---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
20549

FORM 20-F

[   ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to
____________________

OR

[   ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-55253

HEMISPHERE ENERGY
CORPORATION(Exact name of Registrant as specified in
its charter)

Province of British Columbia, Canada(Jurisdiction of incorporation or organization)

2000, 1055 West Hastings Street, Vancouver, British
Columbia, Canada V6E 2E9(Address of principal executive
offices)

Dorlyn Evancic, Chief Financial OfficerTelephone: (604) 685-9255Email: info@hemisphereenergy.ca2000, 1055 West Hastings Street, Vancouver, British Columbia,
Canada V6E 2E9(Name, Telephone, E-Mail and/or Facsimile
number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section
12(b) of the Act:

---

|Title of each class | Name of each exchange on which registered
|------------------- | -----------------------------------------

Securities registered or to be registered pursuant to Section
12(g) of the Act: Common shares, no parvalue

Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the
issuers classes of capital or common stock as of the close of the period
covered by the annual report:75,368,498

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.Yes [ 
 ]      No [X]

If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934.Yes [  
]      No [   ]

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.Yes
[X]      No [   ]

Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files).Yes [   ]      No [ 
 ]

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer. See the
definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act.

Large accelerated filer [ 
 ]                       
Accelerated filer [ 
 ]                       
Non-accelerated filer [X]

Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:

U.S. GAAP [   ]
    International Financial Reporting
      Standards as issued
    Other [   ]by the International Accounting
      Standards Board [X]


If Other has been checked in response to previous question,
indicate by check mark which financial statement item the registrant has elected
to follow.Item 17 [   ]      Item 18
[   ]

If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).Yes [   ]      No [X]

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TABLE OF CONTENTS

|ABBREVIATIONS                  | ii            
|------------------------------ | --------------
|BARREL
    OF OIL EQUIVALENCY  | iii           
|CONVERSIONS                    | iii           
|CURRENCY                       | iii           
|FORWARD-LOOKING
    STATEMENTS | iii           
|PART
      I                   |               
|                               | ITEM
      1. 
|                               |               
|                               |               
|                               |               
|                               | ITEM
      2. 
|                               | ITEM
      3. 
|                               |               
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|                               |               
|                               |               
|                               | ITEM
      4. 
|                               |               
|                               |               
|                               |               
|                               |               
|                               | ITEM
      4A.
|                               | ITEM
      5. 
|                               |               
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|                               |               
|                               | ITEM
      6. 
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|                               | ITEM
      7. 
|                               |               
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|                               |               
|                               | ITEM
      8. 
|                               |               
|                               |               
|                               | ITEM
      9. 
|                               |               
|                               |               
|                               |               
|                               |               
|                               |               

i

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|               |                 | F.                                                                                 | EXPENSES
      OF THE ISSUE                  | 62
|-------------- | --------------- | ---------------------------------------------------------------------------------- | -------------------------------------------- | --
|               | ITEM
      10.  | ADDITIONAL
    INFORMATION                                                         | 62                                          
|               |                 |                                                                                    |                                              |   
|               |                 | A.                                                                                 | SHARE
      CAPITAL                          | 62
|               |                 | B.                                                                                 | MEMORANDUM
      AND ARTICLES OF ASSOCIATION | 62
|               |                 | C.                                                                                 | MATERIAL
      CONTRACTS                     | 64
|               |                 | D.                                                                                 | EXCHANGE
      CONTROLS                      | 65
|               |                 | E.                                                                                 | TAXATION                                     | 65
|               |                 | F.                                                                                 | DIVIDENDS
      AND PAYING AGENTS            | 70
|               |                 | G.                                                                                 | STATEMENT
      BY EXPERTS                   | 70
|               |                 | H.                                                                                 | DOCUMENTS
      ON DISPLAY                   | 70
|               |                 | I.                                                                                 | SUBSIDIARY
      INFORMATION                 | 71
|               | ITEM
      11.  | QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                     | 71                                          
|               | ITEM
      12.  | DESCRIPTION
    OF SECURITIES OTHER THAN EQUITY SECURITIES                         | 71                                          
|PART
      II  |                 |                                                                                    |                                              | 71
|               | ITEM
      13.  | DEFAULTS,
    DIVIDEND ARREARAGES AND DELINQUENCIES                                | 71                                          
|               | ITEM
      14.  | MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 71                                          
|               | ITEM
      15.  | CONTROLS
    AND PROCEDURES                                                        | 72                                          
|               | ITEM
      16A. | AUDIT
    COMMITTEE FINANCIAL EXPERT                                               | 73                                          
|               | ITEM
      16B. | CODE
    OF ETHICS                                                                 | 73                                          
|               | ITEM
      16C. | PRINCIPAL
    ACCOUNTANT FEES AND SERVICES                                         | 73                                          
|               | ITEM
      16D. | EXEMPTIONS
    FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                     | 74                                          
|               | ITEM
      16E. | PURCHASES
    OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS         | 74                                          
|               | ITEM
      16F. | CHANGE
    IN REGISTRANTS CERTIFYING ACCOUNTANT                                   | 74                                          
|               | ITEM
      16G. | CORPORATE
    GOVERNANCE                                                           | 74                                          
|               | ITEM
      16H. | MINE
    SAFETY DISCLOSURE                                                         | 74                                          
|PART
      III |                 |                                                                                    |                                              | 74
|               | ITEM
      17.  | FINANCIAL
    STATEMENTS                                                           | 74                                          
|               | ITEM
      18.  | FINANCIAL
    STATEMENTS                                                           | 75                                          
|               | ITEM
      19.  | EXHIBITS                                                                           | 75                                          

In this Form 20-F, the terms we, our, us, our company
and Hemisphere refer, unless the context requires otherwise, to Hemisphere
Energy Corporation and its subsidiaries, if any, through which it conducts
business.

ABBREVIATIONS

|Oil and Natural Gas Liquids |                                    | Natural Gas |                              
|--------------------------- | ---------------------------------- | ----------- | -----------------------------
|bbl                         | barrels                            | Mcf         | thousand cubic feet          
|bbl/d                       | barrels per day                    | Mcf/d       | thousand cubic feet per day  
|bopd                        | barrels of oil per day             | MMcf        | million cubic feet           
|boe                         | barrels of oil equivalent          | MMbtu       | million British thermal units
|boe/d                       | boe per day                        | Bcf         | billion cubic feet           
|Mboe                        | thousand barrels of oil equivalent | GJ          | gigajoule                    
|Mbbl                        | thousand barrels                   |             |                              
|NGL                         | natural gas liquids                |             |                              

|Other |                                          
|----- | -----------------------------------------
|      |                                          
|M$    | thousands of
      dollars               
|$/boe | dollar per barrel of oil
      equivalent
|ha    | hectare                                  
|3D    | three dimensional                        

ii

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|API  | American
      Petroleum Institute                                                                                                
|---- | ----------------------------------------------------------------------------------------------------------------------------------
|°API | specific gravity of crude oil
      measured on the API gravity scale                                                             
|AECO | Alberta Energy
      Company                                                                                                      
|M3   | Cubic metres                                                                                                                      
|WTI  | West Texas
      Intermediate, the reference price paid in U.S. dollars at Cushing,
      Oklahoma for crude oil of standard grade
|W.I. | working interest                                                                                                                  

BARREL OF OIL EQUIVALENCY

Barrels of oil equivalent (boe) may be misleading,
particularly if used in isolation. A boe conversion ratio of 6 Mcf:1 bbl is
based on an energy equivalency conversion method primarily applicable at the
burner tip and does not represent a value equivalency at the wellhead.

CONVERSIONS

The following table sets forth certain conversions between
Standard Imperial Units and the International System of Units (or metric
units):

|To Convert
      From | To           | Multiply By
|--------------------- | ------------ | -----------
|Mcf                   | cubic metres | 28.174     
|cubic metres          | cubic feet   | 35.494     
|bbl                   | cubic metres | 0.159      
|cubic metres          | bbl          | 6.289      
|feet                  | metres       | 0.305      
|metres                | feet         | 3.281      
|miles                 | kilometres   | 1.609      
|kilometres            | miles        | 0.621      
|acres                 | hectares     | 0.405      
|hectares              | acres        | 2.471      
|gigajoules            | MMbtu        | 0.950      
|MMbtu                 | gigajoules   | 1.0526     

CURRENCY

All amounts are expressed in Canadian dollars unless otherwise
stated. See the information under the heading Item 3.A. Selected Financial Data
 Exchange Rate Data for relevant information about the rates of exchange
between Canadian dollars and United States dollars.

FORWARD-LOOKING STATEMENTS

Certain of the statements in this Form 20-F may be
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include, without
limitation, statements regarding:

- financial and business prospects and financial outlook;
- reserve and production estimates;
- drilling plans;
- activities to be undertaken in various areas;
- timing of drilling;
- recompletion and tie-in of wells;
- tax horizon;
- timing of development of undeveloped reserves;

iii

---

- commodity prices and foreign exchange rates; and
- planned capital expenditures, the timing thereof and the method of
  funding.

Forward-looking statements reflect management's expectations
regarding future plans and intentions, growth, results of operations,
performance and business prospects and opportunities. Words such as may,
will, should, could, anticipate, believe, expect, intend, plan,
potential, continue and similar expressions may be used to identify these
forward-looking statements. These statements reflect management's current
beliefs and are based on information currently available to management.

Forward-looking statements involve significant risk and
uncertainties. A number of factors could cause actual results to differ
materially from the results discussed in the forward-looking statements,
including, but not limited to, risks associated with:

- the inherently speculative nature of oil and gas exploration, development
  and production;
- operational hazards and geological problems;
- volatility in prices and markets for oil and natural gas;
- obtaining additional financing and restrictive terms in future debt
  financing;
- failure to realize anticipated benefits of acquisitions and dispositions;
- dependence on operators of certain of our assets and on our joint venture
  partners;
- restricted access to pipelines, storage and processing facilities;
- unavailability of equipment and qualified personnel;
- estimating oil and natural gas reserves;
- intense competition in the search for, and the acquisition of, oil and
  natural gas properties and in the marketing of oil and natural gas;
- laws and government regulations, including environmental regulation,
  legislative and regulatory initiatives related to climate change and licensing
  and permitting;
- changes to the royalty regime;
- currency fluctuations;
- hedging activities;
- title deficiencies;
- inadequate insurance coverage and uninsurable loss;
- management of growth;
- grant and maintenance of appropriate licenses and leases and working
  interests in licenses and leases;
- seasonal and unexpected weather patterns;
- non-payment or default by third parties;
- loss of key management personnel;
- reassessment of our income tax returns;
- litigation;
- conflicts of interest among our directors and officers;
- title deficiencies and aboriginal title and rights claims;
- restrictive regulation on the marketing of oil and natural gas; and
- recently adopted accounting pronouncements.

The recovery and reserve estimates of our reserves provided in
this Form 20-F are estimates only and there is no guarantee that the estimated
reserves will be recovered. As a consequence, actual results may differ
materially from those anticipated in the forward-looking statements. In
addition, forward-looking statements may include statements attributable to
third party industry sources. There can be no assurances that the plans,
intentions or expectations upon which such forward-looking statements are based
will occur.

Forward-looking statements or information are based on a number
of factors and assumptions that have been used to develop those statements and
information but which may prove to be incorrect. Although we believe that the
expectations reflected in such forward-looking statements or information are
reasonable, undue reliance should not be placed on forward-looking statements
because we can give no assurance that such expectations will prove to be correct. In addition to other factors and assumptions which may
be identified in this document, assumptions have been made regarding, among
other things:

iv

---

- the impact of increasing competition;
- the general stability of the economic and political environment in which
  we operate;
- the timely receipt of any required regulatory approvals;
- our ability to obtain qualified staff, equipment and services in a timely
  and cost efficient manner;
- drilling results;
- the ability of the operator of the projects in which we have an interest
  to operate the project in a safe, efficient and effective manner;
- our ability to obtain financing on acceptable terms;
- well production rates and decline rates;
- the ability to replace and expand our oil and natural gas reserves through
  acquisition, development of exploration;
- the timing and costs of pipeline, storage and facility construction and
  expansion and our ability to secure adequate product transportation;
- future oil and natural gas prices;
- currency, exchange and interest rates;
- the regulatory framework regarding royalties, taxes and environmental
  matters in the jurisdictions in which we operate; and
- our ability to successfully market our oil and natural gas products.

This list is not exhaustive of the factors that may affect any
of our forward-looking statements. Some of the important risks and uncertainties
that could affect forward-looking statements are described further under the
heading Item 3.D. Risk Factors. If one or more of these risks or uncertainties
materializes, or if underlying assumptions prove incorrect, our actual results
may vary materially from those expected, estimated or projected. Forward-looking
statements in this document are not a prediction of future events or
circumstances, and those future events or circumstances may not occur. Given
these uncertainties, users of the information included in this Form 20-F,
including investors and prospective investors are cautioned not to place undue
reliance on such forward-looking statements.

The forward-looking statements in this Form 20-F speak only as
to the date of filing and are based on our beliefs, opinions and expectations at
the time they are made. Except as required by applicable law, including the
securities laws of the United States and Canada, we do not intend to update any
of the forward-looking statements to conform these statements to actual
results.

v

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PART I

ITEM
1.                    
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM
2.                    
OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM
3.                    
KEY INFORMATION

A.                    
Selected Financial Data

Selected Year End Financial Data

We have selected financial data and information in the
following tables for the fiscal years ended February 28, 2011, February 29,
2012, and December 31, 2012, 2013 and 2014 that were derived from our audited
financial statements. These audited financial statements have been audited by
Smythe Ratcliffe LLP. Certain prior years comparative figures have been
reclassified, if necessary.

The information in the following tables should be read in
conjunction with the information appearing under the heading Item 5. Operating
and Financial Review and Prospects and the our audited annual financial
statements for the fiscal year ended December 31, 2014 under the heading Item
18. Financial Statements.

On March 1, 2011, we adopted International Financial Reporting
Standards (IFRS), as issued by the International Accounting Standards Board
(IASB), for financial reporting purposes, using a transition date of March 1,
2010. Our annual audited financial statements for the year ended February 29,
2012, including February 28, 2011 required comparative information, have been
prepared in accordance with IFRS, as issued by the International Accounting
Standards Board. Financial statements prior to the fiscal year ended February
28, 2011 were prepared in accordance with pre-changeover Canadian generally
accepted accounting principles (Canadian GAAP).

On August 20, 2012, we announced that we changed our fiscal
year-end date from February 28 to December 31. In accordance with relevant
legislation, we prepared our first annual audited financial statements as at and
for the ten months ended December 31, 2012 with comparative information as at
and for the twelve months ended February 29, 2012.

Pursuant to Release No. 33-8879 of the United States Securities
and Exchange Commission (SEC), Acceptance from Foreign Private Issuers of
Financial Statements Prepared in Accordance with International Reporting
Standards Without Reconciliation to U.S. GAAP, we have included selected
financial data prepared in compliance with IFRS without reconciliation to U.S.
GAAP.

The following table is a summary of our selected financial
information for each of our four most recently completed financial years. All
information, except number of shares, is in Canadian dollars. The information is
presented in accordance with IFRS.

12 Months Ended
      December 31, 2014
    12 Months Ended
      December 31, 2013(1)
    10 Months Ended
      December 31, 2012(1)
    12 Months Ended
      February 29, 2012(1)
    12 Months Ended
      February 28, 2011Gross oil and gas revenue
    16,635,279
    10,573,199
    7,875,723
    4,590,608
    289,426Net oil and gas revenue
    13,626,902
    8,674,667
    6,503,840
    3,888,263
    257,509Loss for the year before income taxes
    (1,538,255)
    (867,839)
    (159,045)
    (899,638)
    (1,486,455)Income (loss) per share, basic and diluted
    (0.02)
    (0.02)
    (0.00)
    (0.03)
    (0.07)


1

---

Net income (loss) for the year
    (1,667,807)
    (510,266)
    (472,045)
    587,501
    (1,486,455)Net income (loss) per share, basic and
      diluted
    (0.02)
    (0.01)
    (0.01)
    0.02
    (0.07)Weighted-average shares, basic
    70,075,412
    54,479,558
    50,888,868
    34,211,904
    20,067,162Weighted-average shares, diluted
    70,075,412
    54,479,558
    50,888,868
    34,947,858
    20,067,162Number of shares outstanding
    75,368,498
    61,307,498
    53,961,048
    50,374,701
    26,071,682Working capital (deficiency)
    (11,644,609)
    (6,330,906)
    (3,927,595)
    2,363,944
    1,729,423Resource properties and equipment
    45,767,001
    29,412,058
    22,191,275
    13,457,473
    1,122,092Long-term liabilities
    5,177,607
    2,011,282
    467,235
    358,428
    67,676Capital stock
    51,881,960
    42,127,674
    38,805,193
    36,719,485
    24,678,806Retained earnings (deficit)
    (23,702,847)
    (22,568,372)
    (22,131,278)
    (21,659,233)
    (22,254,159)Total assets
    48,951,632
    32,195,577
    24,486,865
    18,466,312
    3,248,901


Note:

| | (1) | Certain amounts were restated retrospectively as
      disclosed in Note 4 of our audited annual financial statements for the
      year ended December 31, 2014.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Exchange Rate Data

The following table sets forth, for each period indicated, the
high, low and average exchange rates for Canadian dollars expressed in United
States dollars, provided by the Bank of Canada. The exchange rates set forth in
the following table demonstrate trends in exchange rates, but the actual
exchange rates used throughout this Form 20-F may vary. The average exchange
rate is calculated by using the average on the last day of each month during the
relevant period. On April 28, 2015, the noon exchange rate for 1 Canadian dollar
expressed in United States dollars as reported by the Bank of Canada, was
Cdn$1.00 = US$0.8319.

$1 Canadian dollar equivalent in U.S. dollars
      (noon exchange rate)
    High
    Low
    AverageYear ended February 28, 2011
    1.0268
    0.9278
    0.9802Year ended February 29, 2012
    1.0583
    0.9430
    1.0084Year ended December 31, 2012
    1.0299
    0.9599
    1.0017Year ended December 31, 2013
    1.0164
    0.9348
    0.9707Year ended December 31, 2014
    0.9444
    0.8568
    0.9052January 2015
    0.8562
    0.7813
    0.8254February 2015
    0.8095
    0.7813
    0.8000March 2015
    0.8060
    0.7791
    0.7924


B.                    
Capitalization and Indebtedness

Not applicable.

C.                    
Reasons for the Offer and Use of Proceeds

Not applicable.

D.                    
Risk Factors

Investors should carefully consider the risk factors set out
below and consider all other information contained here and in our other public
filings before making an investment decision. The risks set out below are not an
exhaustive list, nor should they be taken as a complete summary or description
of all the risks associated with our business and the oil and natural gas
business generally.

2

---

Risks Related to Our Companys Business and Industry

Exploration, development and production of oil and gas
resources are inherently speculative, and a failure to add new reserves would
have a material adverse effect on our financial condition and results of
operations.

Without the continual addition of new reserves, any existing
reserves we may have at any particular time will decline over time as such
existing reserves are depleted and rate of production slows, and therefore our
long-term commercial success depends on our ability to find, acquire, develop
and commercially produce oil and natural gas reserves. Future increase in our
reserves and replacement of our existing reserves will depend not only on our
ability to explore and develop any properties we may have from time to time, but
also on our ability to select and acquire suitable producing properties or
prospects. No assurance can be given that we will be able to continue to locate
satisfactory properties for acquisition or participation. In addition, if
acquisitions or participations are identified, our management may determine that
current markets, the terms of acquisition and participation or pricing
conditions make such acquisitions or participations uneconomic. Further, future
acquisitions or participations that management decides to pursue may involve
unprofitable efforts from dry wells and from wells that are productive but do
not produce sufficient petroleum substances to return a profit after drilling,
operating and other costs. Completion of a well does not assure a profit on the
investment or recovery of drilling, completion and operating costs. There is no
assurance that we will discover or acquire any further commercial quantities of
oil and natural gas to replace our existing reserves or increase our reserves in
the future. Lastly, if commodity prices were to drop significantly, we could
defer our capital expenditure and drilling programs which would delay adding new
reserves to maintain our cash flows and could have a material adverse effect on
our financial condition.

Our future oil and gas exploration, development and
production operations are hazardous and subject to uncertainty, and these
hazards and uncertainties could adversely affect our business, financial
condition, results of operations and prospects.

Oil and natural gas exploration, development and production
operations are subject to all the risks and hazards typically associated with
such operations, including hazards of drilling operations such as fire,
explosion, blowouts, cratering, sour gas releases, spills and extreme weather
conditions, each of which could result in substantial damage to oil and natural
gas wells, production facilities, other property and the environment or personal
injury, and including geological problems such as unexpected formations or
pressures, premature decline of reservoirs and the invasion of water into
producing formations. In particular, we may explore for and produce sour natural
gas in certain areas. An unintentional leak of sour natural gas could result in
personal injury, loss of life or damage to property and may necessitate an
evacuation of populated areas, all of which could result in liability to us.
Such risks and hazards may delay or greatly increase the cost of operations, may
adversely affect the development of new wells or the production from successful
wells and may cause losses that could have a material adverse effect on our
business, financial condition, results of operations and prospects.

Prices and markets for oil and natural gas are
unpredictable and tend to fluctuate significantly which could adversely affect
our net production revenue and oil and natural gas operations, reserves and our
ability to budget for and project the return on acquisitions and on development
and exploration projects.

The prices of oil and natural gas prices may be volatile and
subject to fluctuation, and any material decline in prices could result in a
reduction of our net production revenue and the volumes of our reserves and
could negatively impact our ability to budget for and project the return on
acquisitions and on development and exploration projects.The price of oil
declined from approximately US$80/bbl in November, 2014 to below US$45/bbl
through January, 2015 and has subsequently fluctuated between US$43/bbl and as
high as US$55/bbl.

Prices for oil and gas are subject to large fluctuations in
response to relatively minor changes in the supply of and demand for oil and
gas, market uncertainty and a variety of additional factors beyond our control.
These factors include economic conditions, in the United States and Canada, the
actions of the Organization of the Petroleum Exporting Countries (OPEC),
governmental regulation, political stability in the Middle East and elsewhere,
the foreign supply of oil and gas, risks of supply disruption, the price of
foreign imports and the availability of alternative fuel sources. The economics of producing from some
wells may change as a result of lower prices, which could result in reduced
production of oil or gas and a reduction in the volumes of our reserves. We
might also elect not to produce from certain wells at lower prices. All of these
factors could result in a material decrease in our expected net production
revenue and a reduction in our oil and gas acquisition, development and
exploration activities.

3

---

In addition, any substantial and extended decline in the price
of oil and gas would have an adverse effect on the carrying value of our
reserves, borrowing capacity, revenues, profitability and cash flows from
operations and may have a material adverse effect on our business, financial
condition, results of operations and prospects. In particular, bank borrowings
available to us may, in part, be determined by our borrowing base. A sustained
material decline in prices from historical average prices could reduce our
borrowing base, therefore reducing the bank credit available to us which could
require that a portion, or all, of any of our outstanding bank debt be repaid.

Further, petroleum prices are expected to remain volatile for
the near future as a result of market uncertainties over the supply and the
demand of these commodities due to the current state of the world economies,
OPEC actions and the ongoing credit and liquidity concerns. Volatile oil and gas
prices make it difficult to estimate the value of producing properties for
acquisition and often cause disruption in the market for oil and gas producing
properties, as buyers and sellers have difficulty agreeing on such value. Price
volatility also makes it difficult to budget for and project the return on
acquisitions and on development and exploration projects.

If we are unable to generate sufficient funds from our
operations and other financing sources, we may not be able to undertake or
complete future drilling programs or fund our ongoing activities, which would
adversely affect our business, financial condition, results of operations and
prospects.

Our cash flow from our reserves may not be sufficient to fund
our ongoing activities at all times or to fund the substantial capital
expenditures that we may incur for the acquisition, exploration, development and
production of oil and natural gas reserves in the future, which insufficiency
may cause us to seek financing that could be limited, unavailable or available
only on unfavorable terms. Failure to obtain such financing on a timely basis
could cause us to forfeit our interest in certain properties, miss certain
acquisition opportunities and reduce or terminate our operations. Additional
debt or equity financing may not be available to meet our financing requirements
or, if available, it may not be on terms acceptable to us. The market events and
conditions witnessed over the past several years, including disruptions in the
international credit markets and other financial systems and the deterioration
of global economic conditions, have caused significant volatility to and
reductions in commodity prices. The continued uncertainty in the global economic
situation means that we may continue to face restricted access to capital and
increased borrowing costs. To the extent that our cash flow from our reserves is
insufficient, whether as a result of lower oil and natural gas prices or
otherwise, and that external sources of capital are limited, unavailable or
available only on unfavourable terms, our ability to make capital investments,
maintain existing properties, undertake or complete future drilling programs or
to generally carry out our oil and natural gas acquisition, exploration and
development activities may be constrained, and, as a result, our business,
financial condition, results of operations and cash flow may be materially and
adversely affected.

We may not be able to obtain future debt financing, or
only under restrictive terms, which may adversely impact our exploration and
production activities.

From time to time, we may enter into transactions to acquire
assets or the shares of other organizations. These transactions may be financed
in whole or in part with debt, which may increase our debt levels above industry
standards for oil and natural gas companies of similar size. Depending on future
exploration and development plans, we may require additional debt financing that
may not be available or, if available, may not be available on favourable terms.
Neither our notice of articles nor articles limit the amount of indebtedness
that we may incur. The level of our indebtedness from time to time could impair
our ability to obtain additional financing on a timely basis to take advantage
of business opportunities that may arise.

In addition, the terms of the indebtedness we may incur could
include covenants imposing significant restrictions on us, including limitations
on our ability to encumber or charge our assets or properties in order to secure
any further indebtedness and restrictions on our ability to amalgamate with or
merge into any other entity or sell, transfer, lease or otherwise dispose of all
or substantially all of our properties or assets, without first repaying the
indebtedness in full. These restrictions may affect our ability to operate our
business and may limit our ability to take advantage of potential business opportunities as they arise and, in turn,
may materially and adversely affect our business, financial condition and
results of operations.

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We may not realize anticipated benefits of acquisitions
and dispositions, which could adversely affect our business, financial
condition, results of operations and prospects.

Achieving the benefits of acquisitions and dispositions of
businesses and assets in our ordinary course of business depends in part on
successfully consolidating functions and integrating operations and procedures
in a timely and efficient manner, our ability to realize the anticipated growth
opportunities and synergies from combining the acquired businesses with our
operations and the timing of dispositions to coincide with an advantageous
price. The integration of acquired business may require substantial management
effort, time and resources and may divert management's focus from other
strategic opportunities and operational matters. Management continually assesses
the value and contribution of services provided and assets required to provide
such services. In this regard, non-core assets are periodically disposed of, so
that we can focus our efforts and resources more efficiently. Depending on the
state of the market for such non-core assets at the time of sale, certain of our
non-core assets, if disposed of, could be expected to realize less than their
carrying value on our financial statements. An inability on our part to realize
anticipated benefits of acquisitions and dispositions, whether because of a
failure to consolidate functions and integrate operations and procedures in a
timely and efficient manner, to combine the acquired businesses with our
operations or to dispose of businesses and assets at an opportune time, could
adversely affect our business, financial condition, results of operations and
prospects.

We depend upon operators of certain of our assets and on
joint venture partners, and any failure of an operator or joint venture partner
to perform, or any disputes or disagreement with an operator or joint venture
partner, could adversely affect our business, financial condition, results of
operations and prospects.

We do not operate all of our projects and we own certain of our
projects with joint venture partners. For those projects that we do not operate,
we have limited ability to exercise influence over the operations of our
projects, or the associated costs of operations, that are operated by other
companies. Our return on assets operated by others depends upon a number of
factors that may be outside of our control, including the timing and amount of
capital expenditures, the operator's expertise and financial resources, the
approval of other participants, the selection of technology and risk management
practices. In addition, we own certain of our interests through joint venture or
similar arrangements. Joint ventures involve risks not otherwise present when
exploring and developing properties directly, including, for example, that a
joint venture partner may not pay its share of obligations, we may incur
liabilities as a result of an action taken by a joint venture partner and that
we may be required to devote significant management time to the requirements of
the joint venture for which we will not receive a commensurate return. Failure
of an operator to perform, or disputes with operators or other participants, may
result in delays, litigation or operational impasse. The risks described above
or the failure to resolve disagreements could result in significant cost and
delay, or adversely affect the ability of the parties to operate and develop the
relevant projects, which could adversely affect our business, financial
condition, results of operations and prospects.

Our ability to market oil and natural gas depends on our
ability to transport our product to market, and restricted access to pipelines,
storage and processing facilities may adversely affect our business, financial
condition, results of operations and prospects.

The lack of firm pipeline capacity and the pro-rationing of
capacity on the inter-provincial pipeline systems continues to affect the oil
and natural gas industry in western Canada, which, along with potential
deliverability uncertainties related to the proximity of our reserves to
pipelines and processing and storage facilities and operational problems
affecting such pipelines and facilities, may limit our ability to produce and
market our oil and gas production, and therefore we may receive discounted
pricing. There is no guarantee that current pipeline construction projects,
including projects to increase rail handling and transportation of oil and other
liquid hydrocarbons, presently pending before various regulatory bodies will be
approved or will ameliorate conditions. As a result, even if we are able to
engage in successful exploration and production activities, we may not be able
to effectively market the oil and natural gas that we produce, which could
adversely affect our business, financial condition, results of operations and
prospects.

Unavailability of equipment and qualified personnel could
delay our exploration and production activities which may adversely affect our
business, financial condition, results of operations and prospects.

There can be no assurance that sufficient drilling and
completion equipment, services and supplies will be available when needed or
that qualified personnel will be available. Our oil and gas exploration and
development activities are dependent on the availability of drilling and related
equipment in the particular areas where such activities will be conducted.
Demand for limited equipment or access restrictions may affect the availability
of such equipment to us. Similarly, if the demand for, and wage rates of,
qualified rig crews rise in the drilling industry, then the oil and gas industry
may experience shortages of qualified personnel to operate drilling rigs.
Unavailability of equipment and qualified personnel could each delay our
exploration and development activities, which could adversely affect our
business, financial condition, results of operations and prospects.

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Our reserve estimates depend on many assumptions that may
prove to be inaccurate and are subject to revision based on production history,
and material inaccuracies in the reserve estimates or the underlying
assumptions, or revision based on production history, may adversely affect the
quantities and present value of our reserves.

There are numerous uncertainties inherent in estimating
quantities of oil, natural gas and natural gas liquids reserves and the future
cash flows attributed to such reserves. Our reserves and associated cash flow
information included in this Form 20-F are estimates only. In general, estimates
of economically recoverable oil and natural gas reserves and the future net cash
flows therefrom are based upon a number of variable factors and assumptions,
such as historical production from the properties, production rates, ultimate
reserve recovery, timing and amount of capital expenditures, marketability of
oil and gas, royalty rates, the assumed effects of regulation by governmental
agencies and future operating costs, all of which may vary materially from
actual results. For those reasons, estimates of the economically recoverable oil
and natural gas reserves attributable to any particular group of properties,
classification of such reserves based on risk of recovery and estimates of
future net revenues associated with reserves prepared by different engineers, or
by the same engineers at different times may vary. Our actual production,
revenues, taxes and development and operating expenditures with respect to our
reserves will vary from estimates thereof and such variations could be material.

Estimates of proved reserves that may be developed and produced
in the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Recovery
factors and drainage areas were estimated by experience and analogy to similar
producing pools. Estimates based on these methods are generally less reliable
than those based on actual production history. Subsequent evaluation of the same
reserves based upon production history and production practices will result in
variations in the estimated reserves and such variations could be material.

Competition in the oil and natural gas industry is
intense, and many of our competitors have greater resources than us which can
increase competitive pressures and could have an adverse effect on our business,
financial condition, results of operations and prospects.

The petroleum industry is competitive in all its phases. We
compete with numerous other industry participants in the search for, and the
acquisition of, oil and natural gas properties, and without the acquisition of
suitable oil and gas properties our ability to increase our reserves in the
future may be impaired. In addition, we compete with other industry participants
for the sourcing and availability of equipment, raw materials and component
parts necessary in petroleum and natural gas exploration and development. As
demand for drilling rigs and related equipment and services increases, delays
and increased pricing may occur, either of which could result in delays in our
planned projects and adversely affect our business. Further, we compete with
other industry participants in the distribution and marketing of oil and gas
with respect to price, methods, pipeline access and reliability of delivery and
availability of imported products, all of which may be affected by factors
beyond our control and which could adversely affect the our financial condition
and results of operations. Our competitors include oil and natural gas companies
that have substantially greater financial and technical, resources, staff and
facilities than us, and therefore may be able to take advantage of opportunities
not available to us, obtain drilling rigs and related equipment and services
that we cannot and secure superior means of distribution and marketing of oil
and gas, each of which could have an adverse effect on our business, financial
condition, results of operations and prospects.

Our operations are subject to various laws and
governmental regulations, including permitting, and the implementation of new
regulations or the modification of existing regulations could have an adverse
effect on our business, financial condition, results of operations and
prospects.

The exploration, production, pricing, marketing and
transportation of oil and natural gas are subject to extensive controls and
regulations imposed by various levels of government, which may be amended from
time to time. Governments may regulate or intervene with respect to
exploration and production practices and activities, price, taxes, royalties and
the exportation of oil and natural gas. Also, in order to conduct oil and
naturalgas operations, we will require licenses and permits from various
governmental authorities. There can be no assurance that we will be able to
obtain all of the licenses and permits that may be required to conduct
operations that it may wish to undertake. Governmental regulations may be
changed from time to time in response to economic or political conditions. The
implementation of new regulations or the modification of existing regulations
affecting the oil and natural gas industry could reduce demand for natural gas
and crude oil and increase our costs, any of which may have an adverse effect on
our business, financial condition, results of operations and prospects.

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Our operations are subject to various environmental laws
and regulation, which require compliance that can be burdensome and expensive.

All phases of the oil and natural gas business present
environmental risks and hazards and are subject to environmental regulation
pursuant to a variety of federal, provincial and local laws and regulations.
Environmental legislation provides for, among other things, restrictions and
prohibitions on spills, releases or emissions of various substances produced in
association with oil and natural gas operations. The legislation also requires
that wells and facility sites be operated, maintained, abandoned and reclaimed
to the satisfaction of applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach of applicable
environmental legislation may result in the imposition of fines and penalties,
some of which may be material, the suspension or revocation of necessary
licenses and permits, and civil liability for pollution damage. Environmental
legislation is evolving in a manner expected to result in stricter standards and
enforcement, larger fines and liability and potentially increased capital
expenditures and operating costs. The discharge of oil, natural gas or other
pollutants into the air, soil or water may give rise to liabilities to
governments and third parties and may require us to incur costs to remedy such
discharge. No assurance can be given that environmental laws will not result in
a curtailment of production or a material increase in the costs of production,
development or exploration activities or otherwise have a material adverse
effect on our business, financial condition, results of operations and
prospects.

Legislative and regulatory initiatives related to climate
change could have an adverse effect on our operations and on the demand for oil
and gas.

Studies over recent years have indicated that emissions of
certain gases may be contributing to a warming of the Earth's atmosphere. In
response to these studies, governments have begun adopting domestic and
international climate change regulations that require reporting and reductions
of the emission of greenhouse gases. Methane, a primary component of natural
gas, and carbon dioxide, a by-product of the burning of oil, natural gas and
refined petroleum products, are considered greenhouse gases. There has been much
public debate with respect to Canada's and Provincial Governments respective
strategies with respect to climate change and the control of greenhouse gases.
See the discussion under the heading Item 4.B. Government Regulations 
Environmental and Climate ChangeRegulation. Any existing or future
legislative or regulatory initiatives that restrict or reduce emissions of
greenhouse gases could result in increased operating and compliance costs to us
and, further, may adversely affect demand for the fossil fuels we produce,
including by increasing the cost of combusting fossil fuels and by creating
incentives for the use of alternative fuels and energy. Implementation of such
initiatives for reducing greenhouse gases could accordingly have an adverse
impact on the nature of oil and natural gas operations, including ours. Given
the evolving nature of the debate related to climate change and the control of
greenhouse gases and the evolving legislative requirements, it is not possible
to predict the impact on us and our operations and financial condition.

Changes to the royalty regime may reduce our earnings and
adversely affect our financial condition and results of operations.

There can be no assurance that the governments of Alberta,
British Columbia or Canada will not adopt a new royalty regime or modify the
methodology of royalty calculations that would increase the royalties we pay.
See the information regarding royalty rates under the heading Item 4.B.
Government Regulations  Provincial Royalties and Incentives. An increase of
royalty rates would reduce our earnings and make certain of our projects
uneconomic.

Fluctuations in foreign currency exchange rates could
have an adverse effect on our business and results of operations.

World oil and gas prices are quoted in United States dollars
and the price received by Canadian producers, including us, is therefore
affected by the Canadian/United States dollar exchange rate, which will
fluctuate over time. In recent years, the Canadian dollar has increased
materially in value against the United States dollar. Material increases in the
value of the Canadian dollar negatively impact our production revenues. Future
Canadian/United States dollar exchange rate fluctuations could accordingly
impact our cash flows and the future value of our reserves as determined by
independent evaluators.

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Our future hedging activities may not prove beneficial.

From time to time, we may enter into agreements to receive
fixed prices on our oil and natural gas production to offset the risk of revenue
losses if commodity prices decline; however, if commodity prices increase beyond
the levels set in such agreements, we will not benefit from such increases and
we may nevertheless be obligated to pay royalties on such higher prices, even
though not received by it, after giving effect to such agreements.

We may incur losses as a result of title deficiencies as
title to our oil and natural gas producing properties cannot be guaranteed and
may be subject to prior recorded or unrecorded agreements, transfer, claims or
other defects.

Although title reviews may be conducted prior to the purchase
of oil and natural gas producing properties or the commencement of drilling
wells, such reviews do not guarantee or certify that an unforeseen defect in the
chain of title will not arise to defeat our claim, and our actual interest in
properties may, therefore, vary from our records. The loss of a property,
including the loss of our investment, or the loss of the right to produce all or
a portion of oil and gas resources under a property could have a material
adverse effect on our business, financial condition, results of operations and
prospects.

Exploration and development oil and gas properties
involve significant risks that cannot always be covered by insurance or
contractual protections, and in the event that a significant accident occurs for
which we are not fully insured, our business, financial conditions, results of
operations and prospects could be adversely affected.

Our involvement in the exploration for and development of oil
and natural gas properties may result in us becoming subject to liability for
pollution, blow outs, leaks of sour natural gas, property damage, personal
injury or other hazards. Although we maintain insurance in accordance with
industry standards to address certain of these risks, such insurance has
limitations on liability and may not be sufficient to cover the full extent of
such liabilities. In addition, such risks are not, in all circumstances,
insurable or, in certain circumstances, we may elect not to obtain insurance to
deal with specific risks due to the high premiums associated with such insurance
or other reasons. The payment of any uninsured liabilities would reduce the
availability of our funds. The occurrence of a significant event that we are not
fully insured against, or the insolvency of the insurer of such event, may have
a material adverse effect on our business, financial condition, results of
operations and prospects.

We may be unable to manage our anticipated growth.

We may be subject to growth-related risks including capacity
constraints and pressure on our internal systems and controls. Our ability to
manage growth effectively will require us to continue to implement and improve
our operational and financial systems and to expand, train and manage our
employee base. Our inability to deal with this growth may have a material
adverse effect on our business, financial condition, results of operations and
prospects.

We are dependent upon the grant and maintenance of
appropriate licenses and leases and if we are unable to meet all obligations
necessary to maintain these licenses and leases it could have an adverse effect
on our business, financial condition, results of operations and prospects.

Our properties are held in the form of licences and leases and
working interests in licences and leases. If we or the holder of a licence or
lease fails to meet the specific requirement of such licence or lease, such
licence or lease may terminate or expire. There can be no assurance that any of
the obligations required to maintain each licence or lease will be met. The
termination or expiration of our licences or leases or the working interests
relating to a licence or lease may have a material adverse effect on our
business, financial condition, results of operations and prospects.

Seasonal and unexpected weather patterns may lead to a
decrease in exploration and production activity which would adversely impact our
operations.

The level of activity in the Canadian oil and gas industry is
influenced by seasonal weather patterns. Wet weather and spring thaw may make
the ground unstable. Consequently, municipalities and provincial transportation
departments enforce road bans that restrict the movement of rigs and other heavy
equipment, thereby reducing activity levels. Also, certain oil and naturalgas producing areas are located in areas that are inaccessible other than
during the winter months because the ground surrounding the sites in these areas
consists of swampy terrain. Seasonal factors and unexpected weather patterns may
lead to declines in our exploration and production activity during certain parts
of the year, which would adversely impact our operations.

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We may be exposed to third-party credit risk through
certain of our business arrangements, and non-payments or defaults by these
third parties could have an adverse effect on our financial condition and
results of operations.

We may be exposed to third party credit risk through our
contractual arrangements with our current or future joint venture partners,
marketers of our oil and natural gas production and other parties. In the event
such entities fail to meet their contractual obligations to us, such failures
may have a material adverse effect on our business, financial condition, results
of operations and prospects. In addition, poor credit conditions in the industry
and of joint venture partners may impact a joint venture partner's willingness
to participate in an ongoing capital program, potentially delaying the program
and the results of such program until we find a suitable, alternative partner.

Our business may suffer if we lose key management
personnel which could result in us having to cease operations.

Our success depends in large measure on certain key management
personnel. Competition for qualified personnel in the oil and natural gas
industry is intense, and there can be no assurance that we will be able to
attract, retain and replace all personnel necessary for the development and
operation of our business. We do not have any key person insurance. The loss of
the services of key management personnel may have a material adverse effect on
our business, financial condition, results of operations and prospects, and
could ultimately cause us to cease operations.

Reassessment of our income tax returns may prove to be
detrimental to our business and financial condition.

We file all required income tax returns and believe they are in
full compliance with the provisions of the Income Tax Act (Canada) and
all other applicable provincial tax legislation. However, such returns are
subject to reassessment by the applicable taxation authority. In the event of a
successful reassessment, whether by re-characterization of exploration and
development expenditures or otherwise, such reassessment may have an impact on
current and future taxes payable and could be detrimental to our business and
financial condition.

Our operations are subject to various litigation risks
that could impact our financial condition and results of operations.

In the normal course of our operations, we may become involved
in, named as a party to, or be the subject of, various legal proceedings,
including regulatory proceedings, tax proceedings and legal actions, relating to
personal injuries, property damage, property taxes, land rights, the environment
and contract disputes. The outcome of outstanding, pending or future proceedings
cannot be predicted with certainty and may be determined adversely to us and as
a result, could have a material adverse effect on our assets, liabilities,
business, financial condition and results of operations. Even if we prevail in
any such legal proceeding, the proceedings could be costly and time-consuming
and may divert the attention of management and key personnel from our business
operations, which could adversely affect our financial condition.

Conflicts of interest may arise among our directors and
officers as a result of their involvement with other oil and gas endeavors
leading to the potential loss of personnel which could adversely affect our
business, financial condition, results of operations and prospects.

There are potential conflicts of interest to which some of our
directors and officers will be subject in connection with our operations. Some
of our directors and officers are engaged and will continue to be engaged in the
search of oil and gas interests on their own behalf and on behalf of other
corporations. Richard Wyman, one of our directors, is also a director of Tower
Resources Ltd. and is president and director of Northern Cross (Yukon) Ltd. Such
associations may give rise to conflicts of interest from time to time that can
be resolved only through our directors and officers exercising such judgment as
are consistent with duties to their other business interests and ours. Such conflicts pose the risk that we may enter into a transaction on
terms which place us in a worse position than if no conflict existed.

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Conflicts of interest, if any, that arise will be subject to
and be governed by procedures prescribed by the Business Corporations Act
(British Columbia) (the BCBCA) which requires a director or officer of a
corporation who is a party to or is a director or an officer of or has a
material interest in any person who is a party to a material contract or
proposed material contract with us, to disclose his interest and to refrain from
voting on any matter in respect of such contract unless otherwise permitted
under the BCBCA.

Our properties and assets may be subject to aboriginal
title and rights claims and if such a claim is successfully made in respect of
our property or assets, it could adversely affect our business, financial
condition, results of operations and prospects.

Aboriginal peoples have claimed aboriginal title and rights to
portions of western Canada. We are not aware that any claims have been made in
respect of our properties and assets; however, if a claim arose and was
successful, our ability to develop such property and assets could be impaired,
or we may lose the such property and assets altogether, each of which could have
an adverse effect on our business, financial condition, results of operations
and prospects.

Restrictive regulation may limit our ability to market
oil and natural gas and could adversely affect our business, financial
condition, results of operations and prospects

Restrictive regulation implemented in the future could affect
our ability to market oil and natural gas.

The producers of oil are entitled to negotiate sales contracts
directly with oil purchasers, with the result that the market determines the
price of oil. Oil prices are primarily based on worldwide supply and demand. The
specific price depends in part on oil quality, prices of competing fuels,
distance to the markets, the value of refined products, the supply/demand
balance, and other contractual terms. Oil exporters are also entitled to enter
into export contracts with terms not exceeding one year in the case of light
crude oil and two years in the case of heavy crude oil, provided that an order
approving such export has been obtained from the National Energy Board of Canada
(the NEB). Any oil export to be made pursuant to a contract of longer duration
(to a maximum of 25 years) requires an exporter to obtain an export licence from
the NEB and the issuance of such licence requires a public hearing and the
approval of the Governor in Council.

The price of natural gas is determined by negotiation between
buyers and sellers. Natural gas exported from Canada is subject to regulation by
the NEB and the Government of Canada. Exporters are free to negotiate prices and
other terms with purchasers, provided that the export contracts must continue to
meet certain other criteria prescribed by the NEB and the Government of Canada.
Natural gas (other than propane, butane and ethane) exports for a term of less
than two years or for a term of two to 20 years (in quantities of not more than
30,000 m3/day), must be made pursuant to an NEB order. Any natural
gas export to be made pursuant to a contract of longer duration (to a maximum of
25 years) or a larger quantity requires an exporter to obtain an export licence
from the NEB and the issuance of such licence requires a public hearing and the
approval of the Governor in Council.

The governments of Alberta and British Columbia also regulate
the volume of natural gas that may be removed from those provinces for
consumption elsewhere based on such factors as reserve availability,
transportation arrangements, and market considerations.

Subject to certain limitations under the North American Free
Trade Agreement among the governments of Canada, U.S., and Mexico, effective on
January 1, 1994 (NAFTA), Canada may impose export restrictions on oil and
natural gas to the U.S.

Any inability to market our oil and natural gas due to
restrictive regulations could adversely impact our ability to generate revenues
from our petroleum assets, business, financial condition, result from operations
and prospects.

Recently adopted accounting pronouncements may impact our
future results and financial position.

Certain pronouncements have been issued by the IASB that are
mandatory for accounting periods after December 31, 2014 or later periods. The new
standards, amendments and interpretations, which are set forth under the heading
Item 5. Operating and Financial Review and Prospects  Future Accounting
Pronouncements, have not been early adopted in our financial statements. We
cannot predict what impact, if any, the new guidance will have on our future
results and financial position.

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Risks Relating to the Common Shares

We have never paid dividends and do not expect to do so
in the foreseeable future.

We do not currently pay any dividends on our outstanding common
shares. Payments of dividends in the future will be dependent on, among other
things, our cash flow, results of operations and financial condition, the need
for funds to finance ongoing operations and other considerations, as our board
of directors (Board of Directors) considers relevant.

Future sales or issuances of equity securities could
decrease the value of the common shares, dilute investors' voting power and
reduce our earnings per share.

Our constating documents permit it to issue an unlimited number
of common shares. Our goal is to continually increase our oil and gas reserves.
To achieve that goal, we will require substantial amounts of capital in excess
of funds from operations. We may choose to raise the required capital through
the issuance of additional common shares or other securities convertible,
exercisable or exchangeable for common shares. We may also make future
acquisitions through the issuance of shares. We cannot predict the size of
future issuances of equity securities or the size and terms of future issuances
of debt instruments or other securities convertible, exercisable or exchangeable
into common shares or the effect, if any, that future issuances and sales of our
securities will have on the market price of the common shares. Any transaction
involving the issuance of previously authorized but unissued shares, or
securities convertible, exercisable or exchangeable into common shares,
including exercises of presently outstanding options, would result in dilution
to holders of common shares.

Re-sales of substantial amounts of the common shares, or the
availability of such securities for re-sale, could adversely affect the
prevailing market price for the common shares and dilute our earnings per share.
A decline in the market price of the common shares could impair our ability to
raise additional capital through the sale of securities should we have the
desire to do so.

The market price of our common shares may be volatile and
your investment in our common shares could suffer a decline in value.

The market price of common shares may fluctuate due to a
variety of factors relative to our business, including announcements of new
developments, fluctuations in our operating results, sales of the common shares
in the marketplace, failure to meet analysts expectations, any public
announcements made in regards to us, the impact of various tax laws or rates and
general market conditions or the worldwide economy. In recent years, stock
markets have experience significant price fluctuations, which have been
unrelated to the operating performance of the affected companies. There can be
no assurance that the market price of our common shares will not experience
significant fluctuations in the future, including fluctuations that are
unrelated to our performance, and volatility may affect your ability to sell our
common shares at an advantageous price.

Since our officers and directors are located in Canada,
it may be difficult to enforce any U.S. judgment for claims brought against us
or our officers and directors.

We are organized under the laws of the Province of British
Columbia, Canada, our assets are located in Canada and many of our officers and
directors are residents of Canada. While a cross border treaty exists between
the U.S. and Canada relating to the enforcement of foreign judgments, the
process of such is cumbersome and in some cases has prevented the enforcement of
judgments. As a result, while actions may be brought in Canada, it may be
impossible to affect service of process within the U.S. on our officers and
directors or to enforce against these persons any judgments in civil and
commercial matters, including judgments under U.S. federal securities laws. In
addition, a Canadian court may not permit an original action in Canada or
enforce in Canada a judgment of a U.S. court based on civil liability provisions
of U.S. federal securities laws.

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ITEM
4.                    
INFORMATION ON THE COMPANY

A.                    
History and Development of the Company General

Our head office is located at 2000, 1055 West Hastings Street,
Vancouver, British Columbia, Canada V6E 2E9 and our registered office is located
at 2900-550 Burrard Street, Vancouver, British Columbia, Canada V6C 0A3. Our
telephone number is (604) 685-9255.

We were originally incorporated as Pan-Cana Development Corp.
on March 6, 1978 under the Company Act(British Columbia) and changed our
name to Hemisphere Development Corp. on May 18, 1978. We are currently organized
pursuant to the BCBCA, which replaced the Company Act (British Columbia)
in 2004. We are a corporation domiciled in British Columbia, Canada.

On December 10, 1999, the shareholders approved a consolidation
of our issued and outstanding shares on the basis of one new share for every
five old shares and our name was changed to Northern Hemisphere Development
Corp. effective January 14, 2000, pursuant to the filing of the requisite
documentation with the Registrar of companies for the Province of British
Columbia.

On April 14, 2009, the shareholders approved a consolidation of
our issued and outstanding shares on the basis of one new share for every five
old shares and our name was changed to Hemisphere Energy Corporation effective
April 24, 2009, pursuant to the filing of the requisite documentation with the
Registrar of companies for the Province of British Columbia.

Our common shares are publicly traded on the TSX Venture
Exchange (the TSX-V) as a Tier 1 issuer under the symbol HME.

General Development of the Business

We are a junior exploration and production, oil and gas company
focused on developing core areas that provide low to medium risk drilling
opportunities to increase production, reserves and cash flow. We have production
in the Jenner and Atlee Buffalo areas of southeast Alberta and the Trutch area
of northeast British Columbia. Our continued growth plan is through drilling
existing prospects and executing strategic acquisitions and farm-ins.

Three Year History of Our Company

Ten months ended December 31, 2012

On June 14, 2012, we entered into a seismic option and farm-in
agreement in the Jenner area which included initial obligations to acquire 3D
seismic data and the option to drill a test well with the potential to acquire
additional 3D seismic and drill additional wells to earn a maximum of 6.5
sections.

On November 16, 2012, we filed a Notice of Change in Year-End
under National Instrument 51-102 - Continuous Disclosure Obligations ("NI
51-102") changing our fiscal year-end from February 28 to December 31 to better
align financial reporting with the calendar year and industry peers. The
transition year from March 1, 2012 to December 31, 2012 included reporting the
nine months ended November 30, 2012, followed by the ten months ended December
31, 2012.

On December 20, 2012, we closed the first tranche of a
non-brokered private placement resulting in the issuance of 1,829,300 units for
gross proceeds of $1,189,045. Each unit consisted of one common share and
one-half of a non-transferable warrant entitling the holder to purchase one
common share at the price of $0.90 until December 20, 2013.

During the year, we successfully drilled eight oil wells (7
horizontal and 1 vertical). We also expanded our landholdings through Crown land
sales, acquiring 2.25 sections (1,440 acres) in southeast Alberta. Existing
facilities at Jenner were upgraded, adding a heated free-water-knockout
separator for greater fluid handling capacity and reduction of operating
costs.

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Fiscal year ended December 31, 2013

On January 25, 2013, we closed the second and final tranche of
a non-brokered private placement resulting in the issuance of 86,900 units for
gross proceeds of $56,485. Each unit consisted of one common share and one-half
of a non-transferable warrant entitling the holder to purchase one common share
at the price of $0.90 until January 25, 2014.

On April 24, 2013, we increased our credit facility from $5.5
million to $9.5 million (the "Credit Facility") as a result of reserve additions
and production increases from our 2012 drilling activity.

On May 14, 2013, we successfully graduated to Tier 1 on the
TSX-V. Tier 1 is the premier tier and is reserved for the most advanced issuers
with the most significant financial resources on the TSX-V.

On October 16, 2013, we entered into a formal letter of intent
with an intermediate Canadian producer to purchase certain oil and gas assets in
the Atlee Buffalo area of southeast Alberta. This acquisition included 100%
working interest in 8.25 sections of contiguous land spanning two large
Glauconitic oil pools at a cost of $3.35 million and an effective date of June
1, 2013. This acquisition subsequently closed on November 18, 2013 and was
funded by the Credit Facility, which was increased to $10.5 million
contemporaneously with the closing of the acquisition.

On December 10, 2013, we closed a Bought Deal Equity Financing
(the "2013 Financing") with a syndicate of underwriters for aggregate gross
proceeds to us of $4.3 million to accelerate our capital program focused on
Jenner and the newly acquired Atlee Buffalo property. The 2013 Financing
resulted in the issuance of 4,182,550 units, comprised of one common share and
one half of one warrant entitling the holder to purchase one common share at the
price of $0.75 until December 10, 2014, and 3,077,000 common shares issued on
CEE flow-through basis.

During 2013, we successfully drilled two horizontal oil wells
in North Jenner. We also expanded our landholdings through Crown land sales,
acquiring 13.75 sections (8,800 acres) in southeast Alberta. We upgraded our
main oil battery by increasing our water handling capacity and debottlenecking
our oil processing system as a means to optimize fluid rates at a number of
existing wells and increase base oil production.

Fiscal year ended December 31, 2014

On March 13, 2014, we announced our Board of Directors approved
the adoption of an Advance Notice Policy (the "Policy"). The purpose of the
Policy is to: (i) facilitate an orderly and efficient annual general or, where
the need arises, special meeting, process, (ii) ensure that all shareholders
receive adequate notice of the director nominations and sufficient information
regarding all director nominees, and (iii) allow shareholders to register an
informed vote after having been afforded reasonable time for appropriate
deliberation. The Policy was ratified by our shareholders at our annual general
and special meeting held June 6, 2014.

On May 14, 2014, we closed a Bought Deal Equity Financing (the
"2014 Financing") with a syndicate of underwriters for aggregate gross proceeds
of $10.0 million to accelerate our capital program focused on Atlee Buffalo and
Jenner. The 2014 Financing resulted in the issuance of 13,333,500 common shares.

On September 9, 2014, we announced the promotion of Mr. Ian
Duncan from Vice President of Engineering to Chief Operating Officer and the
appointment of Ms. Ashley Ramsden-Wood to Vice President of Engineering.

On October 7, 2014, we appointed Mr. Richard Wyman to the Board
of Directors.

Effective November 28, 2014, we successfully increased the
Credit Facility to $15.0 million as a result of the drilling activities and
production growth from our 2014 capital program.

During the year, we successfully drilled 10 horizontal oil
wells in Atlee Buffalo, two horizontal oil wells in Jenner, and one vertical
test well in Jenner. We expanded our landholdings through Crown land sales
acquiring 2,560 hectares in southeast Alberta. We installed a solution gas
compressor at our main production facility in Jenner to increase volume
through-put. We also acquired 3D seismic in each of the Atlee Buffalo and Jenner
areas.

Financings

In addition to production revenue, we have financed operations
through funds from loans, private placements of common shares, bought deal
equity financings of common shares, common shares issued for property and shares
issued upon exercise of stock options and share purchase warrants. See the table
and accompanying notes under the heading Item 10.A. Share Capital  Common
Shares which summarizes our issuances of common shares for the past three
fiscal years.

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Capital Expenditures

We are focused on developing core areas that provide low to
medium risk drilling opportunities to increase production, reserves and cash
flow. Our continued growth plan is through drilling existing prospects and
executing strategic acquisitions and farm-ins.

Past Capital Expenditures

The following table sets forth our principal capital
expenditures and divestitures since the beginning of our last three financial
years to December 31, 2014.

Fiscal year ended or period
    Cash flows used for
      equipment and resource propertiesDecember 31, 2014
    21,366,366(1)December 31, 2013
    9,973,313(2)December 31, 2012(3)
    11,767,518(3)


Notes:

| | (1) | $46,970 of these funds was spent on the purchase of
      corporate assets and equipment and $21,319,396 was spent on our resource
      properties. For a breakdown on the resource property expenditures, see
      Notes 8 and 9 of our audited annual financial statements for the years
      ended December 31, 2014 and December 31, 2013 included in this Form 20-F.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | All of these funds were spent on our resource properties.
      For a breakdown on the resource property expenditures, see Notes 8 and 9
      of our audited financial statements for the years ended December 31, 2014
      and December 31, 2013 included in this Form 20-F.                                                                                            
| | (3) | Due to our fiscal year-end change, this fiscal year
      represents a ten month period.                                                                                                                                                                                                                                                                                    

During the year ended December 31, 2014, we successfully
drilled 10 horizontal oil wells in Atlee Buffalo, two horizontal oil wells in
Jenner, and one vertical test well in Jenner. We also completed the construction
of two multi-well batteries and multiple pipelines in Atlee Buffalo, various
equipment upgrades and replacements and the installation of a solution gas
compressor at the main production facility in Jenner. During the year, we closed
an acquisition in the Atlee Buffalo area for proceeds of $510,000 which included
an 85% working interest in 1.75 sections (1,120 acres) of land adjacent to our
existing land base. We also expanded our landholdings through Crown land sales
acquiring 7,520 acres in southeast Alberta. Lastly, we shot two 3D seismic
surveys in the Jenner and Atlee Buffalo areas to evaluate future drilling
locations and reserve potential.

These capital expenditures were funded by our credit facility,
cash flows from our oil and natural gas and a bought-deal equity financing which
closed on May 14, 2014 for aggregate gross proceeds of $10,000,125.

During the year ended December 31, 2013, we drilled two new
wells in north Jenner and built and upgraded infrastructure in the Jenner area.
The infrastructure included pipelines for new well and upgrades to our main
Jenner battery. The upgrades included an increase in fluid handling capacity and
the installation of a solution gas sweetening tower, which allows us to sell our
gas. We also completed a property acquisition of oil and gas assets in the Atlee
Buffalo area of southeast Alberta from an intermediate Canadian producer
effective June 1, 2013.

During the ten months ended December 31, 2012, we drilled and
completed eight wells in the Jenner area and built infrastructure at our main
Jenner battery. The infrastructure included pipelines for new wells and
upgrading our main production facility with a new water disposal pump and heated
free-water-knockout separator to allow for greater fluid handling capacity.

14

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The following table sets forth additions to property and
equipment and exploration and evaluation assets.

12 Months Ended
      December 31, 2014 ($)
    12 Months Ended
      December 31, 2013 ($)
    10 Months Ended
      December 31, 2012 ($)Land and lease
    311,090
    117,274
    19,648Geological and geophysical
    1,747,813
    368,116
    251,605Drilling and completions
    13,254,809
    2,476,925
    6,946,744Investment in facilities
    5,370,943
    3,914,804
    4,478,757Development capital
    20,684,657
    6,877,119
    11,696,754Property acquisitions
    634,739
    3,092,055
    191,644Fixed assets
    46,970
    -
    -Dispositions
    (50,000)
    -
    -Total capital expenditures
    21,316,364
    9,969,174
    11,888,398


Reconciliation

The following table provides reconciliation from total capital
expenditures to the cash flows used for equipment and resource properties for
the twelve months ended December 31, 2014, twelve months ended December 31, 2013
and ten months ended December 31, 2012.

12 Months Ended
      December 31, 2014 ($)
    12 Months Ended
      December 31, 2013 ($)
    10 Months Ended
      December 31, 2012 ($)Total capital expenditures
    21,316,364
    9,969,174
    11,888,398Exploration and evaluation
      expense(1)
    -
    -
    (120,882)Accumulated depletion associated with
      disposition(2)
    -
    4,139
    -Proceeds from disposition(3)
    50,000
    -
    -Cash flows used for equipment and resource
      properties
    21,366,364
    9,973,313
    11,767,518


Notes:

| | (1) | In the past, we included exploration and evaluation
      expenses in our capital expenditures schedule, which created a variance
      when comparing to the Statement of Cash Flows. We revised this reporting
      effective December 31, 2013.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | This was an immaterial amount which was not segregated
      from accumulated depreciation in theStatement of Cash Flows.                                                                                                                          
| | (3) | These proceeds resulted from the disposition of a
      vertical treater from our Jenner facility.                                                                                                                                                 

Present capital expenditures

We currently have no capital expenditure programs in progress
and have delayed any future capital expenditure programs subject to improvements
in market conditions and commodity prices. See the discussion under the heading
Item 6.B Liquidity and Capital Resources.

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B.                    
Business Overview

General

We are a junior exploration and production, oil and gas company
focused on developing core areas that provide low to medium risk drilling
opportunities to increase production, reserves and cash flow. We have production
in the Jenner and Atlee Buffalo areas of southeast Alberta and the Trutch area
of northeast British Columbia. Our continued growth plan is through drilling
existing prospects and executing strategic acquisitions and farm-ins.

Operations and Principal Activities

Our operations and principal activities consist of the
exploration for and production of oil and natural gas.

Daily Production

The following table sets forth our average daily production for
the three months ended December 31, 2014 and December 31, 2013, and the years
ended December 31, 2014 and December 31, 2013.

3 Months Ended
      December 31, 2014
    3 Months Ended
      December 31, 2013
    12 Months Ended
      December 31, 2014
    12 Months Ended
      December 31, 2013Oil (bbl/d)
    763
    443
    583
    381Natural gas (Mcf/d)
    720
    746
    593
    474NGL (bbl/d)
    3
    2
    2
    3Total (boe/d)
    885
    569
    683
    463Oil and NGL weighting
    86%
    78%
    86%
    83%


The increases in oil production for the three and twelve months
ended December 31, 2014 can be attributed to the successful development of our
Atlee Buffalo and Jenner areas which resulted in twelve new producing oil wells
during the year, four of which came on in the fourth quarter of 2014. Gas
production increased in 2014 as a result of higher gas volumes being realized
from the Atlee Buffalo wells and the installation of a solution gas compressor
at the Jenner facility which has increased gas volume throughput.

Summary of Operations Highlights

The following table sets forth our production, average realized
prices and revenue for each of the last three fiscal years.

12 Months Ended December 31,
      2014
    12 Months Ended December 31,
      2013
    10 Months Ended December 31,
      2012ProductionOil (bbl/d)
    583
    381
    378Natural gas (Mcf/d)
    593
    474
    161NGL (bbl/d)
    2
    3
    3Total (boe/d)
    683
    463
    408


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Average realized pricesCrude oil ($/bbl)
    73.87
    71.19
    66.76Natural gas ($/Mcf)
    4.08
    3.45
    2.07NGL ($/bbl)
    54.85
    68.60
    60.87Combined ($/boe)
    66.68
    62.55
    63.15RevenueOil
    15,717,054
    9,903,388
    7,715,127Natural gas
    883,776
    596,881
    102,009NGL
    34,449
    72,929
    58,587Total
    16,635,279
    10,573,199
    7,875,723


Marketing and Customers

We market oil and natural gas production from our properties.
We sell oil and natural gas to purchasers at market prices. Some of the our
natural gas contracts have terms of greater than twelve months and all of our
oil contracts have terms of twelve months or less. We normally sell production
to a relatively small number of customers, as is customary in the exploration,
development and production business. The market for our oil and natural gas
production is well-established. We have no export sales.

Commodity Price Environment

Our results of operations and financial condition are
significantly affected by oil and natural gas commodity prices, which can
fluctuate dramatically. The market for oil and natural gas is beyond our control
and prices are difficult to predict. Please see the discussion under the heading
Item 5.D. Trends.

Seasonality

The exploration for and development of oil and natural gas
reserves is dependent on access to areas where production is to be conducted. We
have properties in Alberta and British Columbia which are accessible by heavy
equipment in winter only when the ground is frozen, typically between December
to early April. For this reason drilling and pipeline construction ceases over
the remainder of the year, limiting growth to winter only. Production operations
continue year round in these areas once production is established. Seasonal
weather variations, including freeze-up and break-up, affect access in certain
circumstances.

In addition, the demand for, and the price of, natural gas
increases during the colder winter months and decreases during the warmer summer
months. Pipelines, utilities, local distribution companies and industrial users
utilize natural gas storage facilities and purchase some of their anticipated
winter requirements during the summer, which can lessen seasonal demand
fluctuations. Crude oil and the demand for heating oil are also impacted by
seasonal factors, with generally higher prices in the winter. Seasonal
anomalies, such as mild winters, sometimes lessen these fluctuations. Extreme
cold weather may result in sharp increases in the price paid to producers for
their production of natural gas.

Human Resources

As at December 31, 2014, we had eight full-time head office
employees and one full-time field employee. Additionally, we had five part-time
consultants and two full-time field contractors.

Competition

The oil and gas industry is competitive in all its phases. We
compete with numerous other participants in the search for, and the acquisition
of, oil and natural gas properties and in the marketing of oil and natural gas.
Our competitors include resource companies that have greater financial
resources, staff and facilities than us. Competitive factors in the distribution
and marketing of oil and natural gas include price and methods and reliability
of delivery. We believe that our competitive position is equivalent to that of
other oil and gas issuers of similar size and at a similar stage of development.
See the information under the heading Item 3.D. Risk Factors
Competition in the oil and natural gas industry is intense, and many of our
competitors have greater resources than us which can increase competitive
pressures and could have an adverse effect on our business, financial condition,
results of operations and prospects.

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Specialized Skill and Knowledge

We rely on specialized skills and knowledge to gather,
interpret and process geophysical data, operate production facilities and
numerous additional activities required to produce oil and natural gas. We have
employed a strategy of contracting consultants and other service providers to
supplement the skills and knowledge of our permanent staff in order to provide
the specialized skills and knowledge to undertake our oil and natural gas
operations effectively.

Government Regulations

Provincial Royalties and Incentives

General

Other than relatively small amounts held by private parties and
First Nations, natural resources in Canada are owned by each Province,
respectively. As such, royalties fall primarily under provincial jurisdiction.
Provincial royalty regimes are a significant factor in the profitability of
crude oil, natural gas liquids, sulphur, and natural gas production. Royalties
payable on production from lands other than Crown lands are determined by
negotiation between the mineral freehold owner and the lessee, although
production from such lands is subject to certain provincial taxes and
royalties.

Provincial Crown royalties are determined by governmental
regulation and are generally calculated as a percentage of the value of gross
production. The rate of royalties payable generally depends in part on
prescribed reference prices, well productivity, geographical location, field
discovery date, method of recovery, and the type or quality of the petroleum
product produced. Other royalties and royalty-like interests are, from time to
time, carved out of the working interest owner's interest through non-public
transactions. These are often referred to as overriding royalties, gross
overriding royalties, net profits interests, or net carried interests.

Occasionally, the governments of the western Canadian provinces
create incentive programs for exploration and development. Such programs often
provide for royalty rate reductions, royalty holidays, and tax credits, and are
generally introduced when commodity prices are low. The programs are designed to
encourage exploration and development activity by improving earnings and cash
flow within the industry. Generally, royalty holidays and reductions reduce the
amount of Crown royalties paid by oil and gas producers to the provincial
governments and increase the net income and funds from operations of such
producers.

Alberta

In Alberta, producers of oil and natural gas from Crown lands
are required to pay annual rental payments, currently at a rate of $3.50 per ha,
and make monthly royalty payments in respect of oil and natural gas produced.

Under the current Alberta Royalty Framework (ARF), royalty
rates for oil and natural gas are set by a single sliding rate formula which is
applied monthly using separate variables to account for production rates and
market prices. The maximum royalty payable under the ARF for oil is 40%, and the
maximum royalty payable for natural gas is 36%. The Government of Alberta also
levies royalties on volumes of propane, butane, pentanes plus, bitumen and
sulphur produced from Crown lands.

There are several incentive programs currently in effect to
stimulate oil and gas investment in Alberta. The Natural Gas Deep Drilling
Program provides royalty incentives for deep natural gas wells. A new-well
incentive program applies to wells beginning production of conventional oil and
natural gas and provides for a maximum 5% royalty rate for the first 12 months
of production, up to a maximum of 50,000 barrels or 500 MMcf of natural gas. The Emerging Resource and Technologies Initiative is intended to
accelerate technological development and facilitate the development of
unconventional resources and applies similar 5% royalty rates to horizontal gas
and oil wells, coal bed methane wells and shale gas wells. An Enhanced Oil
Recovery program encourages the injection of fluids such as hydrocarbons, carbon
dioxide, nitrogen, chemicals and other approved substances for the recovery of
additional oil.

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Producers of oil and natural gas from freehold lands in Alberta
are required to pay a freehold mineral tax levied by the Government of Alberta
on the value of oil and natural gas production from non-Crown lands. The
freehold mineral tax is levied on an annual basis on calendar year production
using a formula that takes into consideration, among other things, the volume of
monthly production, a specified rate of tax for both oil and gas and the
percentages that the owners hold in the title. On average, the tax levied is 4%
of revenues reported from fee simple mineral title properties.

British Columbia

Producers of oil and natural gas from Crown lands in British
Columbia are required to pay annual rental payments with respect to the Crown
leases (currently at a rate of $7.50 per ha), and make monthly payments in
respect of royalties and freehold production taxes due in respect of oil and gas
produced from Crown and freehold lands.

The amount payable as a royalty in British Columbia in respect
of oil depends on the type of oil, the value of the oil, the quantity of oil
produced in a month, and the vintage of the oil. Generally, the vintage of oil
is based on the determination of whether the oil is produced from a pool
discovered before October 31, 1975 (old oil), between October 31, 1975, and
June 1, 1998 (new oil), or after June 1, 1998 (third-tier oil). The royalty
rates are calculated in three stages, which take into account the vintage of the
oil, if the oil produced has already been sold and any royalty exempt value
applicable. Oil produced from newly discovered pools may be exempt from the
payment of a royalty for the first 36 months of production or 11,450 m3
produced, whichever comes first; and the royalties for third-tier oil are the
lowest reflecting the higher costs of exploration and extraction that the
producers would incur.

The royalty payable on natural gas produced from British
Columbia Crown lands is determined by a sliding scale based on a reference
price, which is the greater of the average net price obtained by the producer,
and a prescribed minimum price. For non-conservation gas (not produced in
association with oil), the royalty rate depends on the date of acquisition of
the oil and natural gas tenure rights and the spud date of the well and may also
be impacted by the select price, a parameter used in the royalty rate formula to
account for inflation. Royalty rates are fixed for certain classes of
non-conservation gas when the reference price is below the select price.
Conservation gas is subject to a lower royalty rate than non-conservation gas as
an incentive for the production and marketing of natural gas, which might
otherwise have been flared.

The Government of British Columbia has several royalty credit
and royalty reduction programs intended to increase the competitiveness of low
productivity natural gas wells, including the Deep Royalty Credit Program, the
Deep ReEntry Royalty Credit Program, the Deep Discovery Royalty Credit Program,
the Coalbed Gas Royalty Reduction and Credit Program, the Marginal Royalty
Reduction Program, the Ultra-Marginal Royalty Reduction Program, and the Net
Profit Royalty Reduction Program.

Oil produced from an oil well that is located on either Crown
or freehold land and completed in a new pool discovered subsequent to June 30,
1974 may also be exempt from the payment of a royalty for the first 36 months of
production or 11,450 m3 of production, whichever occurs first.

The Government of British Columbia also maintains an
Infrastructure Royalty Credit Program which provides royalty credits for up to
50% of the lesser of the estimated completion cost and the completion cost of
certain approved road construction or pipeline infrastructure projects intended
to improve, or make possible, the access to new and underdeveloped oil and gas
areas.

The Petroleum and Natural Gas Royalty and Freehold Production
Tax Regulation was amended effective April 1, 2013 to provide for a 3% minimum
royalty on affected wells with deep well/deep re-entry credits. The 3% minimum
royalty applies to deep wells when the net royalty payable would otherwise be
zero for a production month.

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Producers of oil and natural gas from freehold lands in British
Columbia are required to pay monthly freehold production taxes to the Government
of British Columbia. For oil, the level of the freehold production tax is based
on the volume of monthly production. For natural gas, the freehold production
tax is determined using a sliding scale formula based on the reference price
similar to that applied to natural gas production on Crown land, and depends on
whether the natural gas is conservation gas or non-conservation gas.

Land Tenure

Crude oil and natural gas located in the western provinces is
owned predominantly by the respective provincial governments. Provincial
governments grant rights to explore for and produce oil and natural gas pursuant
to leases, licences, and permits for varying terms, and on conditions set forth
in provincial legislation, including requirements to perform specific work or
make payments. Oil and natural gas located in such provinces can also be
privately owned and rights to explore for and produce such oil and natural gas
are granted by lease on such terms and conditions as may be negotiated.

Each of the Governments of Alberta and British Columbia has
implemented legislation providing for the reversion to the Crown of mineral
rights of deep, non-productive geological formations at the conclusion of the
primary term of a lease or license. On March 29, 2007, British Columbias policy
of deep rights reversion was expanded for new leases to provide for the
reversion of both shallow and deep formations that cannot be shown to be capable
of production at the end of their primary term.

In Alberta, for leases and licenses issued subsequent to
January 1, 2009, shallow rights reversion is applied at the conclusion of the
primary term of the lease or license. Although Alberta Energy had previously
announced that shallow rights reversions would be implemented for leases and
licences that had been granted prior to January 1, 2009 by the service of
reversion notices at the end of their primary terms, in April 2013, it
communicated to industry that it was deferring the service of such notices
indefinitely.

Environmental and Climate Change Regulation

The oil and natural gas industry is currently subject to
environmental regulations pursuant to a variety of provincial and federal
legislation, which may be amended from time to time. Such legislation provides
for restrictions and prohibitions on spills, releases or emissions of various
substances produced in association with oil and gas operations. The legislation
also requires that wells and facility sites be operated, maintained, abandoned
and reclaimed to the satisfaction of applicable regulatory authorities.
Compliance with such legislation can require significant expenditures and a
breach of applicable environmental legislation may result in the imposition of
fines and penalties, some of which may be material, the suspension or revocation
of necessary licenses and permits, and civil liability for pollution damage.

Alberta

Environmental legislation in Alberta is consolidated in the
Environmental Protection and Enhancement Act (Alberta) (the EPEA) and the Oil
and Gas Conservation Act (Alberta) (the OGCA). The EPEA and OGCA impose
environmental standards, reporting and monitoring obligations, and penalties for
non-compliance.

The Province of Alberta has a single regulator for upstream oil
and gas, oil sands and coal development activity, the Alberta Energy Regulator
(the AER). The objective is enhanced regulatory regime that is efficient,
attractive to business and investors, and effective in supporting public safety,
environmental management and resource conservation while respecting the rights
of landowners. On June 17, 2013, the AER assumed the functions and
responsibilities of the former Energy Resources Conservation Board, including
those found under the Oil and Gas Conservation Act (ABOGCA). On November 30,
2013, the AER assumed the energy related functions and responsibilities of
Alberta Environment and Sustainable Resource Development (AESRD) in respect of
the disposition and management of public lands under the Public Lands Act
(Alberta). On March 29, 2014, the AER assumed the energy related functions and
responsibilities of AESRD in the areas of environment and water under the EPEA
and the Water Act (Alberta), respectively. The AER's responsibilities exclude
the functions of the Alberta Utilities Commission and the Surface Rights Board,
as well as Alberta Energy's responsibility for mineral tenure. The restructuring
of the agencies implementing regulation has not been accompanied by substantive
amendments to the underlying Provincial Government policy or legislation.

20

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The Alberta Land Use Framework (the ALUF) sets out an
approach to manage public and private land use and natural resource development
in a manner that is consistent with the long-term economic, environmental and
social goals of the Government of Alberta. It calls for the development of
region-specific land use plans in order to manage the combined impacts of
existing and future land use within a specific region and the incorporation of a
cumulative effects management approach into such plans.

The Alberta Land Stewardship Act (the ALSA) was proclaimed in
force in Alberta on October 1, 2009 and provides the legislative authority to
implement the policies contained in the ALUF. Regional plans established
pursuant to the ALSA will be binding on the Government of Alberta and provincial
regulators, including those governing the oil and gas industry. In the event of
a conflict or inconsistency between a regional plan and another regulation,
regulatory instrument or statutory consent, the regional plan will prevail.
Further, the ALSA requires local governments, provincial departments, agencies
and administrative bodies or tribunals to review their regulatory instruments
and make any appropriate changes to ensure that they comply with an adopted
regional plan. The ALSA also contemplates the amendment or extinguishment of
previously issued statutory consents such as regulatory permits, leases,
licenses, approvals and authorizations for the purpose of achieving or
maintaining an objective or policy resulting from the implementation of a
regional plan. Among the measures to support the goals of the regional plans
contained in the ALSA are conservation easements, which can be granted for the
protection, conservation and enhancement of land; and conservation directives,
which are explicit declarations contained in a regional plan to set aside
specified lands in order to protect, conserve, manage and enhance the
environment.

The first regional plan under the ALSA, the Lower Athabasca
Regional Plan (the LARP), came into effect on September 1, 2012. The LARP
covers the northeast corner of Alberta and the entirety of the Athabasca oil
sands region. In July 2014, the Government of Alberta approved the South
Saskatchewan Regional Plan (the SSRP) which covers approximately 83,764 square
kilometres and includes 45% of the provincial population. The SSRP was released
in draft form in 2013. With the implementation of the new Alberta regulatory
structure under the AER, AESRD will remain responsible for development and
implementation of regional plans. However, the AER will take on some
responsibility for implementing regional plans in respect of energy related
activities.

The Government of Alberta enacted the Climate Change and
Emissions Management Act (the CCEMA) on December 4, 2003, amending it through
the Climate Change and Emissions Management Amendment Act, which received royal
assent on November 4, 2008. The CCEMA is based on an emissions intensity
approach similar to the Updated Action Plan and aims for a 50% reduction from
1990 emissions relative to GDP by 2020. Facilities in Alberta emitting more than
100,000 tonnes of carbon dioxide equivalent a year are subject to compliance
with the CCEMA. As at year-end 2014, we did not have an interest in any
facilities in Alberta that emit more than 100,000 tonnes of carbon dioxide
equivalent per year.

British Columbia

In British Columbia, the Oil and Gas Activities Act (the
"OGAA") governs conventional oil and gas producers, shale gas producers and
other operators of oil and gas facilities. Under the OGAA, the British Columbia
Oil and Gas Commission (the "Commission") has broad powers, particularly with
respect to compliance and enforcement and the setting of technical safety and
operational standards for oil and gas activities. The Environmental Protection
and Management Regulation establishes the Government's environmental objectives
for water, riparian habitats, wildlife and wildlife habitat, old-growth forests
and cultural heritage resources. The Commission is required to consider these
environmental objectives in deciding whether or not to authorize an oil and gas
activity. In addition, the Petroleum and Natural Gas Act (British Columbia)
requires proponents to obtain various approvals before undertaking exploration
or production work. Such approvals are given subject to environmental
considerations and licences and project approvals can be suspended or cancelled
for failure to comply with this legislation or its regulations.

In February 2008, the Government of British Columbia announced
a revenue-neutral carbon tax that took effect July 1, 2008. This tax is
consumption-based and applied at the time of retail sale or consumption of
virtually all fossil fuels purchased or used in British Columbia. The current
tax level is $30 per tonne of carbon dioxide equivalent. British Columbia is
currently undertaking a comprehensive review of the carbon tax, and may or may
not make changes to its carbon tax regime. In order to make the tax
revenue-neutral, British Columbia has implemented tax credits and reductions in
order to offset the tax revenues that the Government of British Columbia would
otherwise receive from the tax.

21

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On April 3, 2008, British Columbia introduced the Greenhouse
Gas Reduction (Cap and Trade) Act (the "Cap and Trade Act") which received royal
assent on May 29, 2008 and partially came into force by regulation of the
Lieutenant Governor in Council. Unlike the emissions intensity approach taken by
the federal government and the Government of Alberta, the Cap and Trade Act
establishes an absolute cap on GHG emissions. Although more specific details of
British Columbia's cap and trade plan have not yet been finalized, on January 1,
2010, new reporting regulations came into force requiring all British Columbia
facilities emitting over 10,000 tonnes of carbon dioxide equivalents per year to
begin reporting their emissions. Facilities reporting emissions greater than
25,000 tonnes of carbon dioxide equivalents per year are required to have their
emissions reports verified by a third party. Regulations pertaining to proposed
offsets and emissions trading remain in development. As at year-end 2014, we did
not have an interest in any facilities in British Columbia that emit more than
25,000 tonnes of carbon dioxide equivalent per year.

Federal

Pursuant to the Jobs, Growth and Long-term Prosperity Act (the
Prosperity Act) which received Royal Assent on June 29, 2012, the Government
of Canada amended or repealed several pieces of federal environmental
legislation and in addition, created a new federal environment assessment regime
that came into force on July 6, 2012. The changes to the environmental
legislation under the Prosperity Act are intended to provide for more efficient
and timely environmental assessments of projects that previously had been
subject to overlapping legislative jurisdiction.

On April 26, 2007, the Government of Canada released "Turning
the Corner: An Action Plan to Reduce Greenhouse Gases and Air Pollution" (the
"Action Plan") which set forth a plan for regulations to address both GHGs and
air pollution. An update to the Action Plan, "Turning the Corner: Regulatory
Framework for Industrial Greenhouse Gas Emissions", was released on March 10,
2008 (the "Updated Action Plan"). The Updated Action Plan outlines emissions
intensity-based targets which will be applied to regulated sectors on either a
facility-specific, sector-wide or company-by-company basis. Facility-specific
targets apply to the upstream oil and gas, oil sands, petroleum refining and
natural gas pipelines sectors. Unless a minimum regulatory threshold applies,
all facilities within a regulated sector will be subject to the emissions
intensity targets.

Although draft regulations for the implementation of the
Updated Action Plan were intended to become binding on January 1, 2010, only
regulations pertaining to carbon dioxide emissions from coal-fired generation of
electricity have been enacted to date. Further, representatives of the
Government of Canada have indicated that the proposals contained in the Updated
Action Plan will be modified to ensure consistency with the direction ultimately
taken by the United States with respect to GHG emissions regulation. As a
result, it is unclear to what extent, if any; the proposals contained in the
Updated Action Plan will be implemented.

Given the evolving nature of the debate related to climate
change and the control of greenhouse gases and resulting legislative
requirements, it is not currently possible to predict either the nature of those
requirements or the impact on us and our operations and financial condition at
this time.

The North American Free Trade Agreement

Canada is free to determine under NAFTA whether exports of
energy resources to the U.S. or Mexico will be allowed, provided that any export
restrictions do not: (i) reduce the proportion of energy resources exported
relative to domestic use (based upon the proportion prevailing in the most
recent 36 month period); (ii) impose an export price higher than the domestic
price subject to an exception with respect to certain voluntary measures which
only restrict the volume of exports; and (iii) disrupt normal channels of
supply. All three countries are prohibited from imposing minimum or maximum
export or import price requirements, provided, in the case of export price
requirements, any prohibition in any circumstances in which any other form of
quantitative restriction is prohibited, and in the case of import-price
requirements, such requirements do not apply with respect to enforcement of
countervailing and anti-dumping orders and undertakings.

NAFTA contemplates the reduction of Mexican restrictive trade
practices in the energy sector and prohibits discriminatory border restrictions
and export taxes. NAFTA also contemplates disciplines on regulators to ensure
fair implementation of any regulatory changes, to minimize disruption of
contractual arrangements and to avoid undue interference with pricing, marketing
and distribution arrangements, which is important for Canadian natural gas
exports.

22

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C.                    
Organizational Structure

We are not part of a group and do not have any
subsidiaries.

D.                    
Property, Plants and Equipment

Head Office

Our head office is located in rented premises of approximately
4,000 square feet at 2000, 1055 West Hastings Street, Vancouver, British
Columbia, Canada V6E 2E9. We began occupying these premises on June 1, 2014. The
monthly base rent is $15,936.

Oil & Gas Properties

Core Assets

We have two producing core assets located in southeast Alberta.

Jenner

Jenner is located approximately 200 kilometers southeast of
Calgary. We first entered the area in 2010 and own 28,360 gross acres (25,650
net acres) as of December 31, 2014. The property has eight oil pools defined by
3D seismic and 30 identified locations. We have two, owned and operated, oil
processing and water disposal facilities in Jenner with the capability for
expansion.

Atlee Buffalo

Atlee Buffalo is located 220 kilometers southeast of Calgary.
We made our first acquisition in the area in late 2013 and own 7,360 gross acres
(7,192 net acres) as of December 31, 2014. The property has two oil pools
delineated by vertical wells and 65 identified locations. Based on internal
mapping, Atlee Buffalo has high original-oil-in-place and low current recovery
factors.

Non-core Assets

Trutch (Tommy Lakes) is located 250 kilometres northwest of
Fort St. John, British Columbia. We own 35,612 gross acres (21,525 net acres) as
of December 31, 2014, which includes non-operated wells producing liquids rich
natural gas.

We also have various working interests in non-core assets
located in southern Alberta.

Reserve Data

The standards of the SEC require that proved reserves be
estimated using existing economic conditions (constant pricing). Based on this
methodology, our results have been calculated utilizing the 12-month average
price for each of the years presented.

In 2013, we retained McDaniel & Associates Consultants Ltd.
(McDaniel), independent petroleum engineering consultants based in Calgary,
Alberta, to evaluate our properties. Our reserves reports prepared by McDaniel
were completed March 11, 2015 and May 27, 2014 and have effective dates of
December 31, 2014 and December 31, 2013, respectively (together the McDaniel
Reports). The McDaniel Reports evaluated our oil, NGL and natural gas
reserves.

We have also retained Sproule Associates Limited (Sproule),
independent petroleum engineering consultants, based in Calgary, Alberta, to
evaluate our properties. Our reserves reports prepared by Sproule were completed
September 12, 2014 and have an effective date of December 31, 2012 (the Sproule
Report). The Sproule Report evaluated our proved crude oil, natural gas and NGL
reserves.

23

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All properties evaluated are in Canada and specifically in
Alberta and British Columbia.

The tables below are a summary of the oil, NGL and natural gas
reserves attributable to our properties and the net present values of future net
revenue attributable to such reserves as evaluated in the McDaniel Reports and
Sproule Report based on 12 month SEC compliant constant pricing. The tables
summarize the data contained in the McDaniel Reports and Sproule Report and, as
a result, may contain slightly different numbers than such report due to
rounding. Also due to rounding, certain columns may not add exactly.

The net present values of future net revenue attributable to
reserves is stated without provision for interest costs and general and
administrative costs, but after providing for estimated royalties, production
costs, development costs, future capital expenditures and well abandonment costs
for only those wells assigned reserves by McDaniel and Sproule. It should not be
assumed that the undiscounted or discounted net present values of future net
revenue attributable to reserves estimated by McDaniel and Sproule represent the
fair market value of those reserves. Other assumptions and qualifications
relating to costs, prices for future production and other matters are summarized
below. The recovery and reserve estimates of oil, NGL and natural gas reserves
provided are estimates only. Actual reserves may be greater than or less than
the estimates provided.

The McDaniel Reports and the Sproule Report are based on
certain factual data we have supplied to McDaniel and Sproule and on McDaniels
and Sproules opinions of reasonable practice in the industry. The extent and
character of ownership and all factual data pertaining to petroleum properties
and contracts (except for certain information residing in the public domain) we
have supplied to McDaniel and Sproule. McDaniel and Sproule accepted this data
as presented and neither title searches nor field inspections were
conducted.

The recovery and reserve estimates on our properties described
in this Form 20-F are estimates only. The actual reserves on our properties may
be greater or less than those calculated. See the information under Item 3.D.
Risk Factors  Our reserve estimates depend on many assumptions that may prove
to be inaccurate and are subject to revision based on production history, and
material inaccuracies in the reserve estimates or the underlying assumptions, or
revision based on production history, may adversely affect the quantities and
present value of our reserves.

Controls Over Reserve Report Preparation

Our reserve estimates reports as of December 31, 2014 and
December 31, 2013 were prepared by independent qualified reserve evaluators,
McDaniel, and our reserve estimates report as of December 31, 2012 was prepared
by independent qualified reserve auditors, Sproule. To ensure accuracy and
completeness of the data prior to disclosure of reserve estimates to the public,
our Reserves Committee does the following in accordance with applicable laws:
(1) reviews our procedures for providing information to the independent
qualified reserve evaluators, (2) meets with the independent qualified reserves
evaluators to determine whether any restrictions affected the ability of the
qualified reserves evaluators to report without reservation, (3) reviews the
reserves data with management and the independent qualified reserves evaluator.
If the Reserves Committee is satisfied with results of its evaluation it will
approve the content of our reserve disclosure. If any concerns arise in the
reserve committees evaluation, the reserves committee will work with management
and the independent qualified reserves evaluators to resolve the issues before
disclosure of reserves is made public.

As at December 31, 2014, our Reserves Committee was composed of
Bruce McIntyre (Chairman), Don Simmons, Gregg Vernon, and Richard Wyman. As at
the date of this Form 20-F, our Reserves Committee was composed of Bruce
McIntyre (Chairman), Don Simmons, Gregg Vernon, and Richard Wyman. Please see
the biographical information on the members of the Reserves Committee under the
heading Item 6.A. Directors and Senior Management.

Summary of Oil and Gas Reserves as of Fiscal Year-End
Based on Average Fiscal Year Prices

Reserves
    Heavy Oil
    Natural Gas
    Natural Gas LiquidsGross(1)
    Net(2)
    Gross(1)
    Net(2)
    Gross(1)
    Net(2)(Mbbl)
    (Mbbl)
    (MMcf)
    (MMcf)
    (Mbbl)
    (Mbbl)Developed Producing
    944.8
    786.6
    996.0
    899.7
    4.0
    2.9Non-Producing
    190.3
    179.9
    155.0
    142.2
    0
    0Undeveloped
    831.4
    731.7
    411.4
    373.4
    0
    0Total Proved
    1966.4
    1688.2
    1562.3
    1415.2
    4.0
    2.9


Notes:

| | (1) | Gross reserves are working interest reserves before
      royalty deductions.                       
| | --- | ----------------------------------------------------------------------------------------------------
| | (2) | Net reserves include working interest after royalty
      deductions plus royalty interest reserves.

24

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Total Proved Reserves

The following table compares estimated proved reserves and
associated present value, discounted at an annual rate of 10% of the future
revenue before income tax as at December 31, 2014.

|Proved Developed and
      Undeveloped Reserves | Heavy
      Oil(1) | Natural
      Gas(1) | Natural Gas
      Liquids(1) | Total(1) | Net Present Value
      (before tax, discounted at 10% per
      year)(2)
|----------------------------------------------- | ------------------ | -------------------- | ---------------------------- | -------- | -------------------------------------------------------------------------
|(Mbbl)                                          | (MMcf)             | (Mbbl)               | (Mboe)                       | ($M)    
|2014 12-month average prices (SEC)(3)           | 1688.2             | 1415.2               | 2.9                          | 1926.9   | 46,210.3                                                                 

25

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The following table provides the reconciliation to standardized
measure. The information is in thousands of Canadian dollars.

As at December 31, 2014
    Net Present Value,
      discounted at 10% per year(2)(4)Present value of estimated future net cash flows before
      income taxes
    51,685.0Income taxes - discounted
    5,474.7Standardized measure of discounted future net cash flow
    46,210.3


Notes:

| | (1) | Net reserves include working interest after royalty
      deductions plus royalty interest reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Present value of estimated future net cash flows before
      income taxes, discounted at an annual discount rate of 10% (PV-10) is
      considered a non-GAAP financial measure as defined by the SEC. We believe
      that our PV-10 presentation is relevant and useful to investors because it
      presents the discounted future net cash flows attributable to our proved
      reserves before taking into account the related deferred income taxes, as
      such taxes may differ among various companies because of differences in
      the amounts and timing of deductible basis, net operating loss carry
      forwards and other factors. We believe investors and creditors use our
      PV-10, before tax, as a basis for comparison of the relative size and
      value of our proved reserves to the reserve estimates of other companies.
      PV-10 is not a measure of financial or operating performance under GAAP
      and is not intended to represent the current market value of our estimated
      oil and natural gas reserves. PV-10, before tax, should not be considered
      in isolation or as a substitute for the standardized measure of discounted
      future net cash flows as defined under GAAP.
| | (3) | The 12-month average prices (SEC) are calculated based on
      an average of market prices posted at or near the first of each month from
      January to December 2014, adjusted for quality differentials and pipeline
      transportation costs from wellhead to the interstate pipeline prevailing
      at December 31, 2014. The 12-month average prices (SEC) used for our
      properties were Cdn$77.76 per barrel of oil, Cdn$4.50 per Mcf of natural
      gas and Cdn$67.12 per barrel of natural gas liquids.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (4) | Costs associated with extraction of natural gas products
      have in all cases been deducted from the natural gas
  revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

At December 31, 2012, we had six proved undeveloped locations
booked. In the twelve months ended December 31, 2013, no proved undeveloped
reserves were converted to proved developed reserves.

For the fiscal year ended December 31, 2013, an additional
seven proved undeveloped locations were booked on new lands and offsetting
discoveries in the 2012 fiscal year. Two of the previously booked proved
undeveloped locations were taken off the books, bringing the total proved
undeveloped booked locations to eleven at December 31, 2013.

During 2014, 13 wells were drilled, of which five had
previously been booked. These five wells were converted from proved undeveloped
reserves to proved developed reserves. One previously booked location was taken
off the books, and an additional 13 were added. As of December 31,
2014, a total of 18 locations remain booked for future development.

26

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No proved undeveloped reserves have been booked for more than
five years.

Oil and Gas Production, Production Prices and Production
Costs

The following table sets forth our total net oil and gas
production for the twelve months ended December 31, 2014, twelve months ended
December 31, 2013, and ten months ended December 31, 2012. Production came from
our properties located in British Columbia and Alberta, Canada.

ProductionFiscal year ended
    Oil and Natural GasLiquids(bbl)
    Natural Gas(Mcf)
    Total(boe)December 31, 2014
    174,412
    190,568
    206,173December 31, 2013
    140,182
    173,116
    169,034December 31, 2012(1)
    116,520
    49,205
    124,721


Note:

| | (1) | Due to our fiscal year-end change, this fiscal year
      represents a ten month period.
| | --- | ----------------------------------------------------------------------------------------

The following table sets forth the average prices we received
for our production for the twelve months ended December 31, 2014, twelve months
ended December 31, 2013, and ten months ended December 31, 2012.

Average Sales PriceFiscal year ended
    Oil and Natural GasLiquids($/bbl)
    Natural Gas($/Mcf)
    Total($/boe)December 31, 2014
    73.82
    4.08
    66.68December 31, 2013
    71.17
    3.45
    62.55December 31, 2012(1)
    66.72
    2.07
    63.15


Note:

| | (1) | Due to our fiscal year-end change, this fiscal year
      represents a ten month period.
| | --- | ----------------------------------------------------------------------------------------

The following table sets forth the average production costs,
including transportation costs, per unit of production for the twelve months
ended December 31, 2014, twelve months ended December 31, 2013, and ten months
ended December 31, 2012.

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Average Production CostsFiscal year ended
    Oil and Natural Gas Liquids
      ($/bbl)
    Natural Gas ($/Mcf)
    Total ($/boe)December 31, 2014
    18.84
    1.53
    17.44December 31, 2013
    19.73
    1.74
    18.15December 31, 2012(1)
    14.26
    3.75
    14.81


Note:

| | (1) | Due to our fiscal year-end change, this fiscal year
      represents a ten month period.
| | --- | ----------------------------------------------------------------------------------------

Drilling and Other Exploratory and Development Activities

During the last three fiscal years, we drilled the following
wells in Canada.

Fiscal Year Ended
    Net Exploratory Wells
    Net Development WellsProductive
    Dry
    Productive
    DryDecember 31, 2014Oil
    1.0
    -
    12.0
    -Natural Gas
    -
    -
    -
    -Total
    1.0
    -
    12.0
    -December 31, 2013Oil
    -
    -
    2.0
    -Natural Gas
    -
    -
    -
    -Total
    -
    -
    2.0
    -December 31, 2012(1)Oil
    -
    -
    8.0
    -Natural Gas
    -
    -
    -
    -Total
    -
    -
    8.0
    -


Note:

|(1) | Due to our fiscal year-end change, this fiscal year
      represents a ten month period.
|--- | ----------------------------------------------------------------------------------------

Delivery Commitments

We have no current delivery commitments for either oil or
natural gas.

Present Activities

Atlee Buffalo, Alberta

During 2014 we executed three successful drilling programs in
Atlee Buffalo that resulted in 10 horizontal oil wells being placed on
production. The addition of these wells in 2014 resulted in significant
production, reserve and cash flow growth over the previous year. We also shot a
substantial 3D seismic program in Atlee Buffalo during the fourth quarter of
2014 to assist in drilling future locations within the area.

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We closed an acquisition in the Atlee Buffalo area which
included an 85% working interest in 1.75 sections (1,120 acres) of land adjacent
to our existing land base. Additionally, we expanded our landholdings during the
year through Crown land sales, acquiring a total of 1.75 sections (1,120 acres)
in the surrounding Atlee Buffalo area.

Jenner, Alberta

During 2014, we successfully drilled two horizontal oil wells
and one vertical exploration well in Jenner. We also completed a 3D seismic
survey in the fourth quarter of 2014.

We expanded our landholdings during the year through Crown land
sales, acquiring a total of 10 sections (6,400 acres) in the surrounding Jenner
area. We also completed a small acquisition, which included 1.75 sections (1,120
acres) in the Jenner area.

Oil and Gas Properties and Wells

As of December 31, 2014, we had 98 gross (85.7 net) producing
or shut-in oil or natural gas wells.

As at December 31, 2014
    Oil
    Natural GasGross
    Net
    **Gross**
    **Net**Producing
    20.0
    19.8
    15.00
    4.85Shut-In
    40.0
    38.5
    4.00
    3.1875Total
    60.0
    58.3
    19.00
    8.0375


Oil and Gas Properties and Wells

The following table sets forth information for our interest in
oil and gas properties as at December 31, 2014 relating to our leasehold
acreage. Developed acres are acres spaced or assigned to productive wells.
Undeveloped acres are acres on which wells have not been drilled or completed to
a point that would permit the production of commercial quantities of gas or oil,
regardless of whether such acreage contains proved reserves. Gross acres are the
total number of acres in which a working interest is owned. Net acres are the
sum of the fractional working interests owned in gross acres expressed as whole
numbers and fractions thereof.

As at December 31, 2014, our developed and undeveloped acres
are set forth in the following table.

Developed Acreage
    Undeveloped Acreage
    TotalGross
    Net
    Gross
    Net
    Gross
    NetProducing
    14,205
    7,316
    62,887
    50,979
    77,092
  58,295


Our net undeveloped acres as at December 31, 2013, together
with expiries for the period from 2015 to 2017 and thereafter, is set forth in
the following table.

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Location
    Undeveloped Acreage**Net**
    2015 expirations
    2016 expirations
    2017 and thereafter
      expirationsAlbertaAtlee Buffalo
    5,280
    2,720
    2,560
    -Buffalo Lake
    1,280
    1,280
    -
    -Heathdale
    -
    -
    -
    -Jenner
    6,720
    3,520
    2,400
    800Sylvan Lake
    -
    -
    -
    -British ColumbiaTrutch
    17,219
    -
    -
    17,219Total
    30,499
    7,520
    4,960
    18,019


ITEM
4A.                 UNRESOLVED
STAFF COMMENTS

Not applicable.

ITEM
5.                    
OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis of our operating results
and financial condition should be read in conjunction with our audited annual
financial statements for the years ended December 31, 2014 and December 31,
2013, and related notes included under the heading Item 18. Financial
Statements.

Our financial statements for the fiscal years ended December
31, 2014 and December 31, 2013, and ten months ended December 31, 2012 are
presented in Canadian dollars and have been prepared in accordance with IFRS as
issued by the IASB.

Certain forward-looking statements are discussed in this Item 5
with respect to our activities and future financial results. These are subject
to risks and uncertainties that may cause projected results or events to differ
materially from actual results or events. Readers should also read the
Cautionary Note Regarding Forward-Looking Statements and the risk factors
under the heading Item 3.D. Risk Factors.

Critical Accounting Judgments and Estimates

The preparation of these financial statements in conformity
with IFRS requires management to make judgments, estimates and assumptions that
may affect the application of accounting policies and the reported amounts of
assets, liabilities, income and expenses. Actual results may materially differ
from these estimates. Revisions to accounting estimates are recognized in the
year in which the estimates are revised and in any future years affected.

The following are the accounting policies that are subject to
such judgments and the key sources of estimation uncertainty that we believe
could have the most significant impact on the reported results and financial
position.

Critical accounting judgments

Reserves

The estimate of oil and natural gas reserves is integral to the
calculation of the amount of depletion charged to the statements of loss and
comprehensive loss and is also a key determinant in assessing whether the
carrying value of any of our development and production assets have been
impaired. Changes in reported reserves can impact asset carrying values due to
changes in expected future cash flows.

30

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Our Proved and Probable reserves are evaluated and reported on
by independent reserve engineers at least annually in accordance with Canadian
Securities Administrators National Instrument 51-101 Standards of Disclosure of
Oil and Gas Activities ("NI 51-101"). Proved reserves are those reserves that
can be estimated with a high degree of certainty to be recoverable. It is 90%
likely that the actual remaining quantities recovered will exceed the estimated
Proved reserves. Probable reserves are those additional reserves that are less
certain to be recovered than Proved reserves. Reserve estimation is based on a
variety of factors including engineering data, geological and geophysical data,
projected future rates of production, commodity pricing and timing of future
expenditures, all of which are subject to significant judgment and
interpretation.

Identification of cash-generating units ("CGUs")

Our assets are aggregated into CGUs for the purpose of
calculating impairment. CGUs are based on an assessment of the units ability to
generate independent cash inflows. The determination of these CGUs was based on
managements judgment in regards to shared infrastructure, geographical
proximity, petroleum type and similar exposure to market risk and materiality.

Recoverability of asset carrying values

At each reporting date, we assess our petroleum and natural gas
properties and exploration and evaluation assets for possible impairment, to
determine if there is any indication that the carrying amounts of the assets may
not be recoverable. An assessment is also made at each reporting date to
determine whether there is an indication that previously recognized impairment
losses no longer exist or have decreased. Determination as to whether and how
much an asset is impaired, or no longer impaired, involves management estimates
on highly uncertain matters such as future commodity prices, discount rates,
production profiles, operating costs, future capital costs and reserves. Changes
in circumstances may impact these estimates which may impact the recoverable
amount of assets. Any change in the impairment loss or reversal of impairment
loss could have a material financial impact in future periods but future
depletion expense would be impacted as a result.

Critical accounting estimates

Decommissioning obligations

Decommissioning costs will be incurred many years into the
future. Amounts recorded for decommissioning obligations require the use of
managements best estimates of future decommissioning expenditures, expected
timing of expenditures and future inflation rates. The estimates are based on
internal and third party information and calculations are subject to changes in
laws and regulations, public expectations, prices, discovery and analysis of
site conditions, and changes in clean up technology. Actual costs and outflows
can differ from estimates and may have a material impact on earnings or
financial position. For more information on our decommissioning obligations, see
Note 10 of the aforementioned financial statements.

Business combination

Business combinations are accounted for using the acquisition
method. Under this method, management makes estimates of the fair value of
assets acquired and liabilities assumed which includes assessing the value of
petroleum and natural gas properties based upon the estimation of recoverable
quantities of Proved and Probable reserves being acquired.

Share-based payments

We measure the cost of our share-based payments to directors,
officers, employees and consultants by reference to the fair value of the equity
instruments using the Black-Scholes option pricing model at the date they are
granted. The assumptions used in determining fair value include: expected life
of the options, risk-free rates of return and stock price volatility. Changes to
assumptions may have a material impact on the amounts presented. For more
information on our share-based payments, see Note 13(b) of the aforementioned
financial statements.

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Income taxes

Related assets and liabilities are recognized for the estimated
tax consequences between amounts included in the financial statements and their
tax base using substantively enacted future income tax rates. Timing of future
revenue streams and future capital spending changes can affect the timing of any
temporary differences, and accordingly, affect the amount of the deferred tax
asset or liability calculated at a point in time. These differences could
materially impact earnings.

New and Amended Adopted Accounting Standards

Effective January 1, 2014, we adopted the following accounting
policies:

| |  | Amendment to IAS 36 Impairment of Assets, requires
      additional disclosure on the recoverable amounts of an impaired CGU. The
      adoption of this amendment had no impact on the amounts recorded in the
      financial statements for the year ended December 31, 2014 or on the
      comparative periods.                                                                                        
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | IFRIC 21 Levies, clarifies the requirements for
      recognizing a liability for a levy imposed by a government. The adoption
      of this standard had no impact on the amounts recorded in the financial
      statements for the year ended December 31, 2014 or on the comparative
      periods.                                                                                                     
| |  | We changed our accounting for depleting our petroleum and
      natural gas properties. We changed from using the unit-of-production
      method based on production volumes in relation to total estimated Proved
      reserves to total estimated Proved and Probable reserves. The change in
      policy has been applied retrospectively See Note 4 of the aforementioned
      financial statements.

Future Accounting Pronouncements

The IASB International Financial Reporting Interpretations
Committee (IFRIC) have issued pronouncements effective for accounting periods
beginning on or after January 1, 2015. Only those which may have a significant
impact on us are discussed below:

| |  | IFRS 15 Revenue from Contracts with Customersprovides a single, principles based five-step model to be applied to
      all contracts with customers. The five steps in the model are as
      follows:
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                        
| |   | o                                                                                                                                                                                                      
| |   | o                                                                                                                                                                                                      
| |   | o                                                                                                                                                                                                      
| |   | o                                                                                                                                                                                                      
| |   | o                                                                                                                                                                                                      

Guidance is provided on topics such as the point in which
revenue is recognized, accounting for variable consideration, costs of
fulfilling and obtaining a contract and various related matters. New disclosures
about revenue are also introduced.

Applicable to our annual period beginning on January 1, 2017.
We have not yet assessed the impact of this pronouncement.

| |  | IFRS 9 Financial Instruments (2014)is a finalized
      version of IFRS 9, which contains accounting requirements for financial
      instruments, replacing IAS 39 Financial Instruments: Recognition and
      Measurement.The standard contains requirements in the following
      areas:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                              
| |   | o                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                              
| |   | o                                                                                                                                                                                                                                                                                            

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| | o | Hedge accounting. Introduces a new hedge accounting model
      that is designed to be more closely aligned with how entities undertake
      risk management activities when hedging financial and non- financial risk
      exposures.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Applicable to our annual period
beginning on January 1, 2018. We have not yet assessed the impact of this
pronouncement.

Financial Instruments and Risk Management

Fair value estimates of financial instruments are made at a
specific point in time, based on relevant information about financial markets
and specific financial instruments. As these estimates are subjective in nature,
involving uncertainties and matters of significant judgment, changes in
assumptions can significantly affect estimated fair values. Our financial
instruments include accounts receivable, reclamation deposits, bank
indebtedness, accounts payable and accrued liabilities.

The fair values of accounts receivable, reclamation deposits,
bank indebtedness, accounts payable and accrued liabilities approximate their
carrying values due to the short-term maturity of these financial
instruments.

Our activities expose us to a variety of risks that arise as a
result of our exploration, development, production and financing activities. The
following provides information about our exposure to any risks associated with
the oil and gas industry as well as our objectives, policies and processes for
measuring and managing risk.

Business Risk

Oil and gas exploration and development involves a high degree
of risk whereby many properties are ultimately not developed to a producing
stage. There can be no assurance that our future exploration and development
activities will result in discoveries of commercial bodies of oil and gas.
Whether an oil and gas property will be commercially viable depends on a number
of factors including the particular attributes of the reserve and its proximity
to infrastructure, as well as commodity prices and government regulations,
including regulations relating to prices, taxes, royalties, land tenure, land
use, and environmental protection. The exact effect of these factors cannot be
accurately predicted, and the combination of these factors may result in an oil
and gas property not being profitable.

Credit risk

Credit risk is the risk of financial loss if a customer or
counterparty to a financial instrument fails to meet its payment obligations.
This risk arises principally from our receivables from joint operators and oil
and natural gas marketers, and reclamation deposits. The credit risk associated
with reclamation deposits is mitigated by ensuring these financial assets are
placed with major financial institutions with strong investment-grade ratings by
a primary ratings agency. The credit risk associated with accounts receivable is
mitigated as we monitor monthly balances to limit the risk associated with
collections. We do not anticipate any default. There are no balances past due or
impaired.

Our maximum exposure to credit risk is set forth in the
following table.

12 Months Ended December 31,
      2014 ($)
    12 Months Ended December 31,
      2013 ($)
    10 Months Ended December 31,
      2012 ($)Accounts receivableTrade receivables
    1,041,843
    927,768
    669,357Receivables from joint venture
    95,355
    42,663
    40,419Reclamation deposits
    105,535
    105,535
    100,535Total
    1,242,733
    1,075,966
    810,311


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We sell the majority of our oil production to a single oil
marketer and, therefore, are subject to concentration risk which is mitigated by
our policies and practices related to credit risk, as discussed above.
Historically, we have never experienced any collection issues with our oil
marketer.

Liquidity risk

Liquidity risk is the risk that we will not be able to meet our
financial obligations as they come due. We manage liquidity risk by anticipating
operating, investing and financing activities and ensuring that we will have
sufficient liquidity to meet our liabilities when they become due, under both
normal and stressed conditions, without incurring unacceptable losses or risking
damage to us.

We prepare expenditure budgets on a quarterly and annual basis
which are regularly monitored and updated when necessary in order to review debt
forecasts and working capital requirements. All of our financial liabilities
have contractual maturities of less than 90 days.

As at December 31, 2014, we had negative working capital of
$11,644,609 (December 31, 2013 - $6,330,906), which includes bank indebtedness
of $7,184,147 (December 31, 2013 - $4,500,000). We fund our operations through
revenue and a demand operating credit facility. All of our financial liabilities
have contractual maturities of less than 90 days.

Market risk

Market risk is the risk that changes in market prices, such as,
foreign exchange rates, commodity prices, and interest rates will affect the
value of the financial instruments. Market risk is comprised of interest rate
risk, foreign currency risk, commodity price risk and other price risk.

Interest rate risk

Interest rate risk is the risk that future cash flows will
fluctuate as a result of changes in market interest rates. Borrowings under our
credit facilities are subject to variable interest rates. A one percent change
in interest rates would not have a material effect on net loss and comprehensive
loss.

Foreign currency risk

Our functional and reporting currency is Canadian dollars. We
do not sell or transact in any foreign currency, however commodity prices are
largely denominated in US Dollars (USD), and as a result the prices that we
receive are affected by fluctuations in the exchange rates between the USD and
the Canadian dollar. The exchange rate effect cannot be quantified, but
generally an increase in the value of the Canadian dollar compared to the USD
will reduce the prices received for our crude oil and natural gas sales. We did
not have any foreign exchange rate swaps or related contracts in place as at the
date of this document.

Commodity price risk

Commodity prices for petroleum and natural gas are impacted by
global economic events that dictate the levels of supply and demand, as well as
the relationship between the Canadian dollar and the USD. Significant changes in
commodity prices may materially impact our ability to raise capital. We have not
entered into any commodity hedge contracts as at the date of this document.

Other price risk

Other price risk is the risk that the fair or future cash flows
of a financial instrument will fluctuate due to changes in market prices, other
than those arising from interest rate risk, foreign currency risk or commodity
price risk. We are not exposed to significant other price risk.

A.                    
Operating Results

Year ended December 31, 2014 compared to year ended
December 31, 2013

1. Revenue

Total revenue for the year ended December 31, 2014 was
$16,635,279, representing an increase of $6,062,080 (57%) over the comparable
year of 2013, as outlined by commodity in the table below. This increase in
revenue is consistent with the 48% growth in total production of 220 boe/d as a
result of our drilling programs in the Atlee Buffalo and Jenner areas and the 7%
increase in combined average realized price of $4.13/boe for the year.

34

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Year Ended December 31,
      2014 ($)
    Year Ended December 31,
      2013 ($)
    Change ($)Oil
    15,717,054
    9,903,388
    5,813,666Natural gas
    883,776
    596,881
    286,895NGL
    34,449
    72,929
    (38,480)Total
    16,635,279
    10,573,199
    6,062,080


2. Royalties

Royalties for year ended December 31, 2014 increased by
$1,109,845 to $3,008,377 over the comparable year of 2013. This change in
royalties is further described below by oil and natural gas operations.

3. Production and Operating

Operating costs include all costs for gathering, processing,
dehydration, compression, water processing, transportation and marketing of the
oil, natural gas and NGLs, as well as additional costs incurred periodically for
maintenance and repairs. Operating costs for the year ended December 31, 2014
were $4,351,248, which represents an increase of $1,284,074 over the comparable
year of 2013. This change in operating costs is further described below by oil
and natural gas operations.

Oil Operations

The average realized heavy oil price increased during the year
ended December 31, 2014 to $73.87/bbl over the comparable year of 2013. This
$2.68/bbl increase in our realized oil price, along with our increased
production levels for the 2014 year, had a substantial impact on our oil
revenues for the year ended December 31, 2014 which increased by $5,813,666 over
the comparable year of 2013. This increase is a reflection of strong WTI pricing
and a narrow Western Canadian Select ("WCS") oil differential in the first three
quarters of 2014. Also, given that North American crude oil benchmark market
prices are denominated in USD, a decrease in the value of the Canadian dollar
compared to the USD in 2014 has had a positive impact on our average realized
oil price and revenues for the year ended December 31, 2014.

Average oil royalties for the year ended December 31, 2014
increased by $1,086,804, or $0.61/bbl, over the comparable year of 2013. This
increase can be attributed to six Jenner oil wells coming off of their royalty
holiday in 2014 and that the majority of our 2014 production was from Jenner,
which has the highest per boe royalty rate.

Oil operating costs for the year ended December 31, 2014
increased by $942,252 over the comparable year of 2013. This absolute increase
in operating costs can be attributed to increases in production from the
drilling of new wells. On a per boe basis, our operating costs decreased by
$1.15/bbl during the year as a result of realized economies of scale as a result
of drilling new wells in the year. We have also reduced the amount of produced
water that is processed at third-party facilities, which are subject to
processing fees, in order to reduce operating costs.

Oil transportation costs for the year ended December 31, 2014
increased by $312,052 or $0.26/bbl over the comparable year of 2013. This
increase can be attributed to the addition of 10 new Atlee Buffalo horizontal
wells during the 2014 year which have higher transportation costs associated
with trucking production volumes to processing facilities and sales points.

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Natural Gas Operations

Our average realized natural gas price also increased during
the year ended December 31, 2014 to $4.08/Mcf over the comparable year of 2013.
This $0.63/Mcf increase in our realized natural gas price had a positive effect
on our natural gas revenues for the year ended December 31, 2014 which increased
by $286,895 over the comparable year of 2013.

Average natural gas royalties for the year ended December 31,
2014 increased by $23,041 over the comparable year of 2013. This increase can be
attributed to the 119 Mcf/d increase in gas production as well as the 18%
increase in our realized natural gas price for the period.

Natural gas operating expenses for the year ended December 31,
2014 increased by $15,760 over the comparable year of 2013. This increase can be
attributed to higher natural gas volumes from Atlee Buffalo which is being
processed at a third-party facility and subject to processing fees.

Natural gas transportation costs for the year ended December
31, 2014 increased by $14,010 over the comparable year of 2013. This increase
can be attributed to the Atlee Buffalo wells drilled in the 2014 year which,
compared to our Jenner wells, have higher gas production and transportation
charges.

4. Exploration and Evaluation

Exploration and evaluation expense generally consists of
certain geological and geophysical costs, expiry of undeveloped lands and costs
of uneconomic exploratory wells. For the years ended December 31, 2014 and 2013,
exploration and evaluation expenses were $190,887 and $116,006, respectively,
representing an increase of $74,881.

5. Depletion and Depreciation

Depletion and depreciation expense for the year ended December
31, 2014 increased by $1,627,296 to $5,360,989 over the comparable year of
2013.

The significant increase in depletion expense is a result of a
change in our accounting for depleting our petroleum and natural gas properties.
With the acquisition of our core Jenner and Atlee Buffalo properties, the value
of our Proved plus Probable reserves increased substantially. These
acquisitions, in combination with our increased access to capital through
additional equity financings and banking facilities, have expanded our ability
to further the development of exploration assets and Probable reserves. As a
result, we changed from using the unit-of-production method based solely on
production volumes in relation to total estimated Proved reserves to now include
total estimated Proved and Probable reserves.

6. General and Administrative

General and administrative expenses for the year ended December
31, 2014 were $2,654,943, which represents an increase of $777,567 over the
comparable year in 2013. The general and administrative costs include
share-based payments of $452,780 and $360,434 for the year ended December 31,
2014 and 2013 respectively. Gross general and administrative expenses increased
by $870,621 for the year ended December 31, 2014, and we also captured
capitalized overhead in the amount of $472,530 for the new wells drilled and
capital projects completed in the year. The increase in gross general and
administrative costs during the year ended December 31, 2014 can be attributed
to increased investor relations activities of $62,048, consulting fees of
$107,481, professional fees of $137,510, office relocation costs of $113,563 and
staffing costs of $297,953.

We calculate our capitalized general and administrative costs
monthly, based on the capital expenditures incurred in that month. This reflects
the capital component of overhead costs applied for each well drilled and
construction project at the following recovery rates:

|Rates for wells drilled:                            | Rates for construction
      projects:             
|--------------------------------------------------- | ---------------------------------------------------
|3% of the first $50,000; plus                       | 5% of the first $50,000;
      plus                
|2% of the next
      $100,000; plus                 | 3% of the
      next $100,000; plus                
|1% of the cost exceeding the sum of the
      above | 1% of the cost exceeding
      the sum of the above

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7. Impairment of Property and Equipment

The significant decline in crude oil and natural gas prices in
the fourth quarter of 2014 was recognized as an indicator of impairment at
year-end. We performed an impairment test on our petroleum and natural gas
assets and it was determined that the carrying amount of three cash-generating
units ("CGUs") exceeded their recoverable amount. Accordingly, we recognized an
impairment charge of $2,702,925 for the year ended December 31, 2014 which
represents an increase of $2,146,554 in impairment over the comparable 2013
year.

The recoverable amounts of the CGUs were determined with fair
value less costs to sell based on expected future cash flows from Proved plus
Probable reserve value, using discount rates specific to the underlying
composition of assets residing in each CGU. The pre-tax discount rates ranged
from 10% to 15% depending on the nature of the reserves. We also changed our
impairment test to include Proved and Probable reserves of all properties to
maintain consistency with our depletion policy.

8. Finance Expense

Finance expense for the year ended December 31, 2014 increased
by $80,572 over the comparable year in 2013. This increase is primarily the
result of the part XII.6 tax incurred on unspent flow-through expenditures and
increased accretion expense for the year.

As part of finance expense, we recorded $11,889 in part X11.6
tax for the year ended December 31, 2014. This part XII.6 tax is accumulated on
the unspent balance of flow-through expenditures at the end of the quarter. Our
required obligation was to incur qualified expenditures of $2,000,050 by
December 31, 2014 in connection with our flow-through private placement which
closed on December 10, 2013.

Accretion expense represents the adjusted present value of our
decommissioning obligations which include the abandonment and reclamation costs
associated with wells and facilities. As part of finance expense, we recognized
an increase in accretion expense of $60,263 to $66,776 for the year ended
December 31, 2014. The increase is due to the increased decommissioning
obligations associated with new wells acquired in 2014 as well as those new
wells drilled in the Jenner and Atlee Buffalo areas. We also changed our
estimate of decommissioning obligations by using the information as set by the
Alberta Energy Regulator (AER) in Directive 011, as our primary source of
estimating future abandonment and reclamation costs.

8. Flow-through Share Premium Recovery

In connection with the flow-through private placement completed
on December 10, 2013, we have fulfilled our obligation to incur qualified
expenditures of $2,000,050 by December 31, 2014. The qualified expenditures were
spent on two 3D seismic programs in the Jenner and Altee Buffalo areas as well
as the drilling of a vertical test well in Jenner. At December 31, 2014 the
balance in flow-through premium liability has been reduced to nil and
transferred to flow-through share premium recovery.

9. Gain on Disposition

We disposed of a vertical treater from our Jenner facility in
the first quarter of 2014, which resulted in a small gain of $2,942 for the year
ended December 31, 2014.

10. Deferred Tax Expense

We realized an income tax expense for the year ended December
31, 2014 in the amount of $129,552 as compared to an income tax recovery of
$357,573 for year ended December 31, 2013.

37

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Year ended December 31, 2013 compared to the ten months
ended December 31, 2012

Restatement of Previously Reported Results

We have restated certain financial information for the year
ended December 31, 2013 (the "2013 Restatement") which has been disclosed in
Note 4 of our audited annual financial statements for the year ended December
31, 2014.

The material changes included in the 2013 Restatement affect
impairment, depletion, and decommissioning costs and will have a positive
impact, significantly reducing the loss in December 2013 by $3.3 million from
$3.8 million to $0.5 million.

As a result of the adjustment of impairment and depletion costs
due to the effects of IFRS and a change in accounting policy applied
retrospectively, our petroleum and natural gas interests increased by $4.0
million. In addition, we have incorporated the AERs updated decommissioning
directive, which resulted in an increase in decommissioning liability of $0.7
million. The 2013 Restatement affects only non-cash items and therefore has no
impact on cash flow.

1. Revenue

For the twelve months ended December 31, 2013, total revenue
increased by $2,697,476, or 34%, over the ten months ended December 31, 2012.
This increase is consistent with the 14% growth in production as a result of our
drilling programs in the Jenner area and the 6% increase in our average combined
realized price.

38

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12 Months Ended December 31,
      2013 ($)
    10 Months Ended December 31,
      2012 ($)
    Change ($)Oil
    9,903,388
    7,715,127
    2,188,261Natural gas
    596,881
    102,009
    494,872NGL
    72,929
    58,587
    14,342Total
    10,573,199
    7,875,723
    2,697,475


2. Royalties

Royalties for the twelve months ended December 31, 2013
increased by $526,649 over the comparable period of 2012 which can be attributed
to the newly drilled oil wells in Jenner which are subject to Alberta Crown
royalties and gross overriding royalties.

3. Production and Operating

Operating costs for the twelve months ended December 31, 2013
was $3,067,174, which is an increase of $1,220,643 over the comparable period of
2012. This increase in operating costs can be attributed to third party
processing fees for our recently drilled wells in 2013. For 2014, we are
negotiating reduced rates for the third party facility processing.

Oil Operations

Our average realized oil price increased during the twelve
months ended December 31, 2013 to $71.19/bbl over the ten months ended December
31, 2012. This $4.43/bbl increase in our realized heavy oil price contributed to
an increase in our oil revenues of $2,188,261 for the year ended December 31,
2013 over the comparable period of 2012. This increase is a reflection of strong
WTI pricing, combined with narrowing WCS heavy oil differentials during 2013.

Average oil royalties paid for the twelve months ended December
31, 2013 increased by $473,861 over those paid in the ten months ended December
31, 2012. This increase can be attributed to the new wells drilled in the Jenner
area which are subject to Alberta Crown royalties and gross overriding
royalties.

Oil operating expenses increased during the twelve months ended
December 31, 2013 by $984,101, or $5.15/boe, over the ten months ended December
31, 2012. This increase in operating costs can be attributed to third party
processing fees for the recently drilled wells in 2013.

Oil transportation costs paid for the twelve months ended
December 31, 2013 increased by $119,677 over the ten months ended December 31,
2012. This increase in transportation costs can be attributed to our increase in
oil production for the twelve months ended December 31, 2013 as well as third
party fees and trucking costs associated with getting these volumes to sale.

Natural Gas Operations

Our average realized gas price increased during the twelve
months ended December 31, 2013 to $3.45/Mcf over the ten months ended December
2012. This increase of $1.38/Mcf in our realized natural gas price had a
substantial impact on our natural gas revenues for the year ended December 31,
2013, which increased by $494,872 over the ten months ended December 31, 2012.
This increase in realized natural gas price is also consistent with the increase
in the Alberta 30 day spot AECO prices.

Average gas royalties paid for the twelve months ended December
31, 2013 increased by $52,788, or $0.61/boe, over those paid in the ten months
ended December 31, 2012. This increase is consistent with our increase in gas
production of 313 Mcf/d and our $1.38/Mcf increase in our realized natural gas
price in the period.

39

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Natural gas operating expenses for the twelve months ended
December 31, 2013 increased by $105,395 over those paid in the ten months ended
December 31, 2012. This increase in natural gas operating expenses can be
attributed to the relative increase in our gas production of 313 Mcf/d.

Natural gas transportation costs paid for the twelve months
ended December 31, 2013 increased by $11,470 over those paid in the ten months
ended December 31, 2012. This increase in natural gas transportation costs can
be attributed to the relative increase in our gas production of 313 Mcf/d which
is charged a transportation cost in order to get it to sales.

4. Exploration and Evaluation

Throughout the year, expenditures were made on some of our
non-producing properties, including property leases and licenses, reclamation
costs and other general expenses. Exploration and evaluation expenses for the
twelve months December 31, 2013 was $116,006 as compared to $120,882 for the ten
months ended December 31, 2012.

5. Depletion and Depreciation

Depletion and depreciation expense for the twelve months ended
December 31, 2013 increased by $1,220,642 over the comparable period of 2012.
This can mainly be attributed to the increase in depletion relative to our
acquisition of the Atlee Buffalo property in the fourth quarter of 2013, as well
as the development of two producing oil wells during the current fiscal year.

6. General and Administrative

General and administrative expenses for the twelve months ended
December 31, 2013 were $1,877,376 and increased by $349,871 over the ten months
ended December 31, 2012. The general and administrative costs for the twelve
months ended December 31, 2013 and ten months ended December 31, 2012 include
share-based payments of $360,464 and $282,872, respectively. We also captured
capitalized overhead in the amount of $287,159 for the new wells drilled in the
year.

The increase in general and administrative costs can be
attributed to increased investor relations activities of $114,563, increased
professional fees of $59,648 and higher travel and personnel costs of $274,510
as a result of our ongoing expansion.

We calculate our capitalized overhead monthly, based on the
capital expenditures incurred in that month. This reflects the capital component
of overhead costs applied for each well drilled and construction project at the
recovery rates discussed in the general and administrative section of the
operating results for the year ended December 31, 2014.

7. Impairment of Property and Equipment

During the year ended December 31, 2013, we performed an
impairment test on our petroleum and natural gas assets. It was determined that
the carrying amount of two cash-generating units ("CGUs") exceeded their
recoverable amount due to a decline in estimated reserve volumes. Accordingly,
we recognized an impairment charge of $556,371 for the twelve months ended
December 31, 2013 as compared to $184,938 for the ten months ended December 31,
2012.

8. Finance Expense

Finance expense for the twelve months ended December 31, 2013
increased by $155,317 from the comparable period ended December 31, 2012. This
increase is the result of interest charged on our outstanding bank debt, which
increased by $3,465,000 over the ten months ended December 31, 2012.

9. Gain on Disposition

We disposed of a small gas gathering line for our Sylvan Lake
property, which resulted in a gain on disposal of $3,889.

40

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10. Deferred Tax Recovery

We realized an income tax recovery for the twelve months ended
December 31, 2013 in the amount of $357,573 as compared to an income tax expense
of $312,307 for the ten months ended December 31, 2012.

B.                    
Liquidity and Capital Resources

Bank Credit Facility

We have a demand operating credit facility in the amount of
$15,000,000 with Alberta Treasury Branches (ATB) under the Commitment Letter.
The credit facility is secured by a general security agreement and a floating
charge on all of our lands. The credit facility bears interest at the banks
prime rate plus 1.75% as well as a standby charge for any undrawn funds.

Pursuant to the terms of the demand operating credit facility,
we have provided a covenant in the Commitment Letter that at all times our
working capital ratio shall not be less than 1.0 to 1.0. The working capital
ratio is defined under the terms of the Commitment Letter as current assets
including the undrawn portion of the revolving operating demand line credit
facility, to current liabilities, excluding any current bank indebtedness. We
have maintained compliance with this covenant at all times.

As at December 31, 2014, we had drawn a total of $7,184,147
from the credit facility (December 31, 2013 - $4,500,000).

Cash Balances

We had cash and cash equivalents of nil as at December 31, 2014
and nil as at December 31, 2013.

Financial Contracts

We had no financial contracts as at December 31, 2014 or
December 31, 2013.

Working Capital Position

We fund our operations through three key areas: operations
funds flow, equity financings through the capital markets and our demand
operating credit facility.

- Funds flow from operations. We generated funds flow from operations for the
  year ended December 31, 2014 of $6,673,033 (year ended December 31, 2013 -
  $3,789,202).
- Equity financings. On May 14, 2014, we closed a bought deal financing for
  gross proceeds of $10,000,125. Upon the receipt of proceeds we paid off our
  outstanding bank debt which had reached $8,075,000. An additional $921,007 was
  paid in legal and finders fees in conjunction with the closing of the
  financing. Finally, the remaining $1,004,118 was used to fund exploration
  activities, seismic, drilling and related geological work for our Atlee
  Buffalo summer drilling program. See the table under the heading Item 10.A.
  Share Capital  Common Shares which summarizes our issuances of common shares
  for the past three fiscal years and from January 1 to April 28, 2015.
- Demand operating credit facility. We currently have total credit facilities
  limit of $15,000,000, as described under the heading Item 5.B. Liquidity and
  Capital Resources, of which the full amount is available.

In our opinion, funds available from these three sources
provide sufficient working capital for our present requirements and to carry out
future capital expenditure programs and corporate expenses. We have delayed any
capital expenditure programs subject to improvements in market conditions and
commodity prices.

41

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We continue to monitor the current market conditions and will
apply a conservative approach to capital spending during this time of low
commodity prices. We have no drilling commitments or material land expiries in
2015, and have deferred drilling activity until the second half of 2015.

At current oil prices,our production remains cash flow positive
due to our low operating costs. We are presently optimizing our production base
in the Jenner and Atlee Buffalo core areas while minimizing operating costs. At
this time, we will focus on reducing net debt in order to expand our financial
flexibility to pursue potential acquisitions and maximize long-term shareholder
value.

Further, in conjunction with an equity financing that closed in
November 2013, we were required to spend $2,000,050 in flow-through dollars as
part of an exploratory program by December 31, 2014. We spent this capital on
geological and geophysical activities in the fourth quarter of 2014 which
included two 3D seismic programs, one in Atlee Buffalo and one in Jenner, as
well as drilling a vertical test well in Jenner.

Finally, as at December 31, 2014, we had the following rental
commitments over the next five fiscal years set forth in the following table.

2015
    2016
    2017
    2018
    2019Rental Commitment
    $191,226
    $191,226
    $191,226
    $79,678
    $Nil


As at December 31, 2014, we had negative working capital of
$11,644,609, which includes bank indebtedness of $7,184,147. All of our
financial liabilities have contractual maturities of less than 90 days.

As at December 31, 2013, we had negative working capital of
$6,330,906, which included bank indebtedness of $4,500,000.

As at December 31, 2012, we had negative working capital of
$3,927,595, which included bank indebtedness of $1,035,000.

Capital Resources

Twelve Months Ended December 31, 2014

During the year ended December 31, 2014, we successfully
drilled 10 horizontal oil wells in Atlee Buffalo, two horizontal oil wells in
Jenner, and one vertical test well in Jenner. We also completed the construction
of two multi-well batteries and multiple pipelines in Atlee Buffalo, various
equipment upgrades and replacements and the installation of a solution gas
compressor at the main production facility in Jenner. During the year, we closed
an acquisition in the Atlee Buffalo area for proceeds of $510,000 which included
an 85% working interest in 1.75 sections (1,120 acres) of land adjacent to our
existing land base. We also expanded our landholdings through Crown land sales
acquiring 7,520 acres in southeast Alberta. Lastly, we shot two 3D seismic
surveys in the Jenner and Atlee Buffalo areas to evaluate future drilling
locations and reserve potential.

Twelve Months Ended December 31, 2013

During the twelve months ended December 31, 2013, we drilled
two new wells in north Jenner and built and upgraded infrastructure in the
Jenner area. The infrastructure included pipelines for new well and upgrades to
our main Jenner battery. The upgrades included an increase in fluid handling
capacity and the installation of a solution gas sweetening tower, which allows
us to sell our gas. We also completed a property acquisition of oil and gas
assets in the Atlee Buffalo area of southeast Alberta from an intermediate
Canadian producer effective June 1, 2013. These expenditures were funded through
our credit facility as well as a bought-deal equity financing for aggregate
gross proceeds of $4,300,453.

Ten Months Ended December 31, 2012

During the ten months ended December 31, 2012, we drilled and
completed eight wells in the Jenner area and built infrastructure at our main
Jenner battery. The infrastructure included pipelines for new wells and
upgrading our main production facility with a new water disposal pump and
heated free-water-knockout separator to allow for greater fluid handling
capacity. These expenditures were funded through our credit facility, as well as
through a private placement for gross proceeds of $1,189,045 and the exercise of
1,752,047 share purchase warrants for proceeds of $1,051,228.

42

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C.                    
Research and Development, Patents and Licences, etc.

None.

D.                    
Trend Information

Our oil, which represents over 91% of our total revenue for the
year ended December 31, 2014, is sold through a Canadian marketer and is
benchmarked to the WTI index. Over the past three years, WTI crude oil prices
have been relatively stable on a global basis. However, in recent months the
price of oil has fallen from highs of over US$100/bbl in July 2014 to lows of
just over US$40/bbl in March 2015.

General consensus for the reasoning behind this price drop is a
combination of weak world demand due to slowing economic growth in many
countries, coupled with surging North American oil supply due to high prices and
increased development over the past several years. Through early 2014 supply and
demand were well balanced, but by late 2014 supply was predicted to grow much
faster than demand. As prices started to slide, OPEC made the decision in
November 2014 to maintain their market share of oil production rather than cut
back to curb the drop in oil price. The price of oil declined from approximately
US$80/bbl in November, 2014 to below US$45/bbl through January, 2015 and has
subsequently fluctuated between US$43/bbl and as high as US$55/bbl.

The Short-Term Energy and Summer Fuels Outlook Market Prices
and Uncertainty Report (STEO) of the U.S. Energy Information Administration
(EIA), dated April 2015, suggested that initial data from the first quarter of
2015 shows increased oil consumption in response to low oil prices. It also
noted possible increases in supply of oil coming from countries such as Libya,
Iraq, and Iran given the potential of sanctions being lifted in response to a
nuclear framework deal being reached. Notably, the EIA stated that oil market
uncertainty remains at elevated levels and the potential for large upward or
downward shifts in price remain.

The EIA observed in the STEO that natural gas consumption in
2015 and 2016 will average higher than in 2014 due to low prices, which have
fallen significantly to less than US$3/MMBtu (Henry Hub Index) since highs of
US$6/MMBtu in February 2014. Natural gas production growth will remain
significant, but storage inventories are expected to remain relatively balanced
with no significant price changes expected near-term.

E.                    
Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

F.                    
Tabular Disclosure of Contractual Obligations

The following table sets forth our known contractual
obligations as of December 31, 2014 relating to our corporate office and
petroleum producing properties. We have no long term debt or loan
obligations.

Contractual Obligations
    Payments Due by Period ($)Total
    Less than1year
    1-3 years
    3-5 years
    More than5yearsRental commitment(1)
    653,356
    191,226
    382,453
    79,678
    -Bank credit facility(2)
    7,184,147
    7,184,147
    -
    -
    -Total
    7,837,503
    7,375,373
    382,453
    79,678
    -


Notes:

| | (1) | This represents our commitment to make monthly rental
      payments pursuant to a rental agreement for our head office which expires May 30, 2018.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                    
| | (2) | An estimate of interest on our bank credit facility
      cannot be made at this time                                                              

43

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G.                    
Safe Harbor

Not applicable.

ITEM
6.                    
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.                    
Directors and Senior Management

The following table sets forth the name, office held, functions
and areas of experience within our company and principal business activities
performed outside our company of each of our directors and senior management.

Name
    Position(s)
      with Hemisphere
    Director or
      Officer Since
    Principal Business Activities and
      Other Principal DirectorshipsDon Simmons, P. Geol.(1)(3)
    President and Chief Executive
      Officer
    February 2008
    Previously Vice President Exploration of
      Hemisphere from October 2007. Formerly, a Geologist at Sebring Energy
      Inc., Encana Corporation and Alberta Energy Company.Director
    May
      2008Charles OSullivan, B.Sc.(2)(3)
    Chairman Director
    2000 1978
    Geophysicist and Mining Executive. Chairman
      of Hemisphere since 2000. Chairman of Northern Continental Resources
      Inc. from 1986 to 2009.Frank Borowicz, QC, CA (Hon)(3)(4)
    Director
    July 2005
    Retired Partner of Davis LLP until 2011,
      President of Pigasus Consulting Services Ltd, since 2004, and Governor of
      the Vancouver Board of Trade since 2007.Bruce McIntyre, P.Geol.(1)(2)(4)
    Director
    July 2008
    Most recently Executive Director of New Zealand
      Energy Corp. (TSX-V: NZ; OTCQX-NZERF) until June 2014 and previously
      President from April 2011 to July 2012. Prior thereto, an independent
      consultant and President of Wexford Energy Ltd., a private company that
      provides consulting services for the development and operation of
      producing natural gas companies (private and public) since 2007.Gregg Vernon, P. Eng.(1)(4)
    Director
    August 2006
    Currently President of Bochica Oil & Gas
      Inc. Previously Interim President and Chief Executive Officer of
      Petrodorado Energy Ltd. (TSX-V: PDQ) from October 2013 to February 2015.
      Prior thereto, Interim Chief Operating Officer of Petro Magdalena Energy
      Corp. (formerly Alange Energy Corp.) from January, 2011 to its sale in
      July 2012. From October 2007 to September 2009 was the Chairman of
      Prospero Hydrocarbons Ltd, until sold to Alange Energy Corp. Previously,
      Vice President Business Development of Petro Andina Resources Ltd.Richard Wyman, B.Sc., MBA
    Director
    October 2014
    President and Director of Northern Cross
      (Yukon) Ltd., which is a private company, since 2010. Previously, Vice President and
      Senior Oil and Gas Analyst with Canaccord Genuity in 2004. Also, a
      director of Tower Resources Ltd. (TSX  V: TWR).


44

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Ian Duncan, P. Eng.
    Chief Operating Officer
    May 2011
    Appointed Chief Operating Officer in September
      2014. Previously Vice President, Engineering since May 2011 and an
      engineer with Hemisphere since January 2011. Prior thereto, an engineer at
      Solaris MCI and Talisman Energy Inc.Dorlyn Evancic, CGA
    Chief Financial Officer
    July 2007
    Previously Chief Financial Officer of Northern
      Continental Resources Inc. from July 2007 to November 2009. Prior thereto,
      Chief Financial Officer of Guyana Frontier Mining Corp. from December 2010
      to November 2011.Andrew Arthur, P. Geol.
    Vice President, Exploration
    July 2012
    Consultant for Hemisphere since January 2012.
      Prior thereto, Technical Lead Oil Business Unit for Enerplus since
      December 2008 and Vice President, Exploration for PRD Energy Inc. (TSX 
      V: PRD) since October 2006.Ashley Ramsden-Wood, P.Eng.
    Vice President, Engineering
    September 2014
    Previously a consulting engineer for Hemisphere
      since June 2012. Prior thereto, an engineer with NAL Resources from 2005
      to 2011.


Notes:

| | (1) | Member of the Reserves Committee. Mr. McIntyre is the
      Chairman of the Reserves Committee.                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------
| | (2) | Member of the Compensation/Nominating Committee. Mr.
      OSullivan is Chairman of the Compensation/Nominating Committee.
| | (3) | Member of the Corporate Governance Committee. Mr.
      Borowicz is Chairman of Corporate Governance Committee.            
| | (4) | Member of the Audit Committee. Mr. McIntyre is Chairman
      of the Audit Committee.                                      

Don Simmons, P. Geol. (37 years of age)  President, Chief
Executive Officer and Director

Mr. Simmons has extensive experience in petroleum geology and a
proven track record of discovering oil and gas in Western Canada and
internationally. Initially, Mr. Simmons served as our Vice President Exploration
and became President and Chief Executive Officer in February 2008. Prior to
joining Hemisphere, Mr. Simmons was a geologist at a private oil and gas
company, Sebring Energy, until its sale in 2007. Prior thereto, he spent five
years with EnCana working on various projects in southeast Alberta and Ecuador.
Mr. Simmons holds a Bachelor of Science degree in Geological Sciences from
Queens University and is a member of the Association of Professional Engineers
and Geoscientists of Alberta.

Charles OSullivan, B.Sc. (72 years of age)  Chairman and
Director

Mr. OSullivan founded Hemisphere in 1977. He was President
from 1977 to 2001 and remains an active Director and Chairman of the Board. From
1977 to 1983 and under Mr. OSullivans direction, we participated in 86
successful oil and gas wells in the U.S., including the deep Tomcat #1 well. At
the time, this well, in the Anadarko Basin, Oklahoma, was the biggest gas well
ever drilled in the continental U.S. Mr. OSullivan also founded Northern
Continental Resources Inc. in 1986, to explore for uranium in the Athabasca
Basin of Saskatchewan. He served as Chairman until our company was merged in
2009. Subsequently, the merged company was purchased by Rio Tinto for $640
million in 2011. Mr. OSullivan graduated with a Bachelor of Science degree in
geophysics in 1965.

45

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Frank Borowicz, QC, CA (Hon) (66 years of age)  Director

Mr. Borowicz has over 35 years of experience in corporate
governance and regulatory compliance. He is a retired partner of the
international law firm Davis LLP and is a Governor of the Vancouver Board of
Trade. He served as Chairman of the BC Industry Training Authority and is an
independent director of several public and private companies. Educated at
Harvard, Dalhousie and Loyola, Mr. Borowicz is a member of the Institute of
Corporate Directors, is a Queens Counsel, and is an honourary member of the
Institute of Chartered Accountants.

Bruce McIntyre, P.Geol. (60 years of age)  Director

Mr. McIntyre has over 35 years of oil and gas experience and a
proven track record of finding quality oil and gas reserves. Mr. McIntyre was
most recently Executive Director of New Zealand Energy Corp. until June 2014 and
previously, President from April 2011 to July 2012. Prior thereto, Mr. McIntyre
was President and Chief Executive Officer of Sebring Energy Inc., a private
Alberta-based exploration and production company that was sold in July 2007. He
has also held various other management positions including President CEO and
co-founder of Sommer Energy Ltd., President and CEO of TriQuest Energy Corp.,
President and Chief Executive Officer of BXL Energy Ltd. and Exploration Manager
for Gascan Resources Ltd. Mr. McIntyre is a member of the American Association
of Petroleum Geologists, has a Professional Geologist designation with the
Association of Professional Engineers and Geoscientists of Alberta and an
Honorary Member of the Canadian Society of Petroleum Geologists (Past President
2002). Mr. McIntyre holds a Bachelor of Science Degree in Geology (Honours) from
Carleton University and an Advanced Executive Certificate in General Management
from Queens University.

Gregg Vernon, P.Eng. (60 years of age)  Director

Mr. Vernon is a designated professional engineer with over 35
years of international oil and gas industry experience, including managing and
administrating major projects in China, Eastern Canada and South America. He is
currently the interim President and Chief Executive Officer of Petrodorado
Energy Ltd. and President of Bochica Oil & Gas Inc. (private company).
Previously, Mr. Vernon was the interim Chief Operating Officer of PetroMagdalena
Energy Corp. (formerly Alange Energy Corp.), a Canadian-based international oil
and gas exploration and production company until its sale in 2012. He is one of
the founders of Petro Andina Resources Ltd., a Canadian company with operations
in South America. He is a University of Alberta graduate with his degree in
Engineering and is a member of the Society of Petroleum Engineers.

Richard Wyman, B.Sc., MBA (58 years of age)  Director

Mr. Wyman has over 30 years of oil and gas industry experience.
He began his career as a reservoir engineer with Esso Resources Canada Ltd. in
Calgary prior to becoming a corporate finance associate with Wood Gundy in
London. He returned to Canada and became an analyst in the corporate finance and
treasury department of Gulf Canada Limited in Calgary and Toronto and then as an
oil and gas equities research analyst with Peters & Co. Ltd. Following his
tenure at Peters & Co. Ltd., Mr. Wyman became a founding shareholder and
Director of Smart Pipeline Services Ltd. and Northern Cross (Yukon) Ltd. He
returned to a capital market role as Vice President and Senior Oil and Gas
Analyst with Canaccord Genuity under its rebranding process in 2004. In 2010,
Mr. Wyman returned to the industry as President and a Director of Northern Cross
(Yukon) Ltd, a private junior oil and gas, exploration and development company
with assets located in Yukon. Mr. Wyman received a Bachelor of Applied Science
degree in Chemical Engineering (Hons) from Queen's University in 1978 and a
Masters of Business Administration from the International Management Institute
at the University of Geneva in 1985.

Ian Duncan, P. Eng. (32 years of age)  Chief Operating
Officer

Mr. Duncan is a professional engineer with a range of
experience in many different areas within the oil and gas industry, including
drilling, production and facility operations. Mr. Duncan joined Hemisphere in
January 2011 and was quickly promoted to Vice President, Engineering in May
2011. He was appointed Chief Operating Officer September 1, 2014. Previously,
Mr. Duncan was with Solaris MCI, an engineering consulting firm providing
facilities engineering services to Encana in the Horn River Shale Basin. Prior
thereto, Mr. Duncan spent four years with Talisman Energy Inc. on various
exploration projects including Bakken Oil in Saskatchewan and Marcellus Shale
Gas in Pennsylvania. Mr. Duncan holds a Bachelor of Science degree in Chemical
Engineering from the University of Alberta and is a member of the Association of
Professional Engineers and Geoscientists of Alberta.

46

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Dorlyn Evancic, CGA (51 years of age)  Chief Financial
Officer

Mr. Evancic has over 25 years of experience in corporate
finance and management which includes senior executive positions in a number of
public corporations. He has served as Hemispheres Chief Financial Officer since
July 2007. Previously, Mr. Evancic was Chief Financial Officer of Guyana
Frontier Mining Corp, Chief Financial Officer of Northern Continental Resources,
and also a Director and Chief Financial Officer of Gemco Minerals Inc. Prior to
working in the natural resource industry, Mr. Evancics experience included
Director of Administration and Finance of Leisure Canada Inc., Vice President of
Operations for Urban Resource Technologies Inc. and Financial Controller of
Neptune Food Services. He has been a member of the Certified General Accountants
Association since 1989.

Andrew Arthur, P. Geol. (53 years of age)  Vice President,
Exploration

Mr. Arthur has over 24 years of both domestic and international
oil and gas industry experience. He began consulting for Hemisphere in January
2012 and was appointed Vice President, Exploration in July 2012. Throughout his
career, he has been a key technical member in many exploration and development
projects having drilled several hundred wells across the Western Canada
Sedimentary Basin. Exposure to all facets of the oil and gas industry has led
him to progressively senior exploration roles. Mr. Arthur graduated with his
B.Sc. Geology (Honours) from the University of British Columbia in 1985. With
sponsorship from the Geological Survey of Canada, he continued at the University
of British Columbia, completing his Master of Science in Geology in 1987. Mr.
Arthur is a member of the Association of Professional Engineers and
Geoscientists of Alberta.

Ashley Ramsden-Wood, P.Eng. (35 years of age)  Vice
President, Engineering

Ms. Ramsden-Wood is a professional engineer with over 12 years
of oil and gas industry experience with a focus on British Columbia, Alberta and
Saskatchewan. Ms. Ramsden-Wood joined Hemisphere as a consultant in June 2012
and was appointed as Vice President, Engineering effective September 1, 2014.
Ms. Ramsden-Wood started her career at Petro-Canada as a Reservoir Engineer and
then moved on to exploitation/area engineering roles at NAL Resources where she
gained extensive experience in planning and implementing capital projects and
development plans, preparing economic valuations, and evaluating acquisitions.
Ms. Ramsden-Wood holds a Bachelor of Science degree in Chemical Engineering from
the University of British Columbia and is a member of the Association of
Professional Engineers and Geoscientists of Alberta.

4. Family Relationships

There are no family relationships among our directors and
executive officers.

5. Other Arrangements

There is no arrangement or understanding with major
shareholders, customers, suppliers or others, pursuant to which any person was
selected as a director of our Board of Directors or a member of our senior
management.

**B.****Compensation**

The total compensation plan for our executive officers is
comprised of base salary, cash bonus and stock options. The total compensation
plan for our directors is comprised of stock options, with the exception of our
Chairman who receives an annual retainer. There is no policy or target regarding
cash and non-cash elements of our compensation program. The
Compensation/Nominating Committee of our Board of Directors annually reviews the
total compensation of our executive officers against compensation goals and
objectives and makes the recommendations to our Board of Directors concerning
the individual components of the executives compensation. We do not provide
executive officers with any personal benefits, nor do we provide any additional
cash compensation to our executive officers for serving as directors.

The following table sets for the short-term benefits, which are
primarily salaries and wages, and share-based payments, paid to our officers and
directors for our fiscal years ended December 31, 2014 and 2013.

47

---

Year Ended
      December 31,
    2014
    Year Ended
      Deceber 31,
    2013Short-term benefits
    $986,666
    $750,000Share-based payments
    $377,753
    $125,808


Director Compensation

Base Salary or Consulting Fees

During the year ended December 31, 2014, we paid $40,000 in
director fees. These fees were charged for services provided by the Chairman of
our Board of Directors. The following table sets forth compensation paid to our
directors who are not executive officers during the fiscal year ended December
31, 2014.

48

---

Name
    Fees earned
    Option- based
      awards(1)
    Non-equity incentive
      plan compensation
    Pension value
    All other compensation
    TotalFrank S. Borowicz
    Nil
    $21,400
    N/A
    N/A
    Nil
    $21,400Bruce G. McIntyre
    Nil
    $21,400
    N/A
    N/A
    Nil
    $21,400Charles N. OSullivan
    $40,000(2)
    $9,678
    N/A
    N/A
    Nil
    $49,678Greg M. Sadler
    Nil
    $9,678
    N/A
    N/A
    Nil
    $9,678Gregg K. Vernon
    Nil
    $21,400
    N/A
    N/A
    Nil
    $21,400Richard Wyman
    Nil
    $84,860
    N/A
    N/A
    Nil
    $84,860


Notes:

| | (1) | We calculated the compensation cost by using the
      Black-Scholes option pricing model as follows: for options granted during
      the fiscal year ended December 31, 2014 by assuming a risk-free interest
      rate of 1.59%, a dividend yield of nil, expected volatility of our share
      price of 91.99% and an expected life of the options of 5 years.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                     
| | (2) | Charles OSullivan receives annual compensation of
      $40,000 as Chairman of our Board of Directors.                                                                                                                                                                                                                                                             

Outstanding Option-Based Awards

We have no pension plan or other arrangement for non-cash
compensation for our directors, except incentive stock options. The following
table discloses the particulars of all awards outstanding for directors who are
not executive officers as at December 31, 2014, including awards granted before
this most recently completed fiscal year.

Option-based AwardsNumber of securities
    
    
    Value of unexercisedName
    underlying
    Option
    Option expiration
    in-the-moneyunexercised options
    exercise price
    date
    options(1)(#)
    ($)
    
    ($)Frank S. Borowicz
    25,000
    0.65
    September 29, 2019
    -25,000
    0.55
    January 6, 2019
    -50,000
    0.70
    February 7, 2017
    -45,000
    0.40
    May 25, 2016
    -50,000
    0.30
    December 23, 2015
    4,00030,000
    0.26
    September 30, 2015
    3,60050,000(2)
    0.25
    March 8, 2015
    6,500Bruce G. McIntyre
    25,000
    0.65
    September 29, 2019
    -25,000
    0.55
    January 6, 2019
    -50,000
    0.70
    February 7, 2017
    -45,000
    0.40
    May 25, 2016
    -50,000
    0.30
    December 23, 2015
    4,00030,000
    0.26
    September 30, 2015
    3,60050,000(2)
    0.25
    March 8, 2015
    6,500Charles N. OSullivan
    25,000
    0.55
    January 6, 2019
    -50,000
    0.70
    February 7, 2017
    -45,000
    0.40
    May 25, 2016
    -25,000
    0.30
    December 23, 2015
    2,00030,000
    0.26
    September 30, 2015
    3,600100,000(2)
    0.25
    March 8, 2015
    13,000


49



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Gregg K. Vernon
    25,000
    0.65
    September 29, 2019
    -25,000
    0.55
    January 6, 2019
    -50,000
    0.70
    February 7, 2017
    -45,000
    0.40
    May 25, 2016
    -50,000
    0.30
    December 23, 2015
    4,00030,000
    0.26
    September 30, 2015
    3,60050,000(2)
    0.25
    March 8, 2015
    6,500Richard M. Wyman
    200,000
    0.61
    October 7, 2019
    -


Notes:

| | (1) | Value is calculated based on the difference between the
      exercise price of the options and the closing price of the common shares
      on the TSX-Venture on December 31, 2014 of $0.38.                
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Subsequent to the fiscal year ended December 31, 2014,
      all options granted were exercised prior to the expiry date of March 8,
      2015.                                                              
| | (3) | Subsequent to the fiscal year ended December 31, 2014,
      50,000 options were granted to each director on January 29, 2015 with an
      exercise price of $0.24 and expiration date of January 29,
  2020.

Executive Officer Compensation

The following table summarizes compensation paid to the
executive officers, directly or indirectly, during our three most recently
completed fiscal years.

Non-equity incentiveplan
      compensationName andPrincipalPosition
    Fiscal YearEnded
    Salary($)
    Share-basedawards($)
    Option-basedawards(1)($)
    Annualincentiveplans($)
    Long-termincentiveplans($)
    Pensionvalue($)
    All othercompen-sation($)
    Totalcompen-sation($)Don Simmons
    Dec. 31, 2014
    170,000
    N/A
    136,580
    100,000
    N/A
    N/A
    Nil
    406,580President andCEO(6)
    Dec. 31, 2013
    150,000
    N/A
    Nil
    80,000
    N/A
    N/A
    Nil
    230,000Dec. 31, 2012(2)
    125,000
    N/A
    Nil
    50,000
    N/A
    N/A
    Nil
    175,000Ian Duncan(3)
    Dec. 31, 2014
    140,000
    N/A
    42,800
    60,000
    N/A
    N/A
    Nil
    242,800COO
    Dec. 31, 2013
    130,000
    N/A
    Nil
    40,000
    N/A
    N/A
    Nil
    170,000Dec. 31, 2012(2)
    104,167
    N/A
    Nil
    30,000
    N/A
    N/A
    Nil
    134,167Dorlyn Evancic
    Dec. 31, 2014
    140,000
    N/A
    42,800
    50,000
    N/A
    N/A
    Nil
    232,800CFO
    Dec. 31, 2013
    130,000
    N/A
    Nil
    30,000
    N/A
    N/A
    Nil
    160,000Dec. 31, 2012(2)
    108,333
    N/A
    Nil
    20,000
    N/A
    N/A
    Nil
    128,333Andrew Arthur(4)
    Dec. 31, 2014
    140,000
    N/A
    19,355
    50,000
    N/A
    N/A
    Nil
    209,355Vice President,Exploration
    Dec. 31, 2013
    130,000
    N/A
    Nil
    20,000
    N/A
    N/A
    Nil
    150,000Dec. 31, 2012(2)
    98,771
    N/A
    196,386
    10,000
    N/A
    N/A
    Nil
    305,157Ashley
    Dec. 31, 2014
    132,267
    N/A
    113,135
    50,000
    N/A
    N/A
    Nil
    295,402Ramsden-Wood(5)
    Dec. 31, 2013
    120,100
    N/A
    95,300
    20,000
    N/A
    N/A
    Nil
    235,400Vice President,Engineering
    Dec. 31, 2012(2)
    43,350
    N/A
    Nil
    5,000
    N/A
    N/A
    Nil
    48,450


Notes:

| | (1) | We calculated the compensation cost by using the
      Black-Scholes option pricing model as follows: for options granted during
      the fiscal year ended December 31, 2014 by assuming a risk-free interest
      rate of 1.59%, a dividend yield of nil, expected volatility of our share
      price of 91.99% and an expected life of the options of 5 years; for
      options granted during the fiscal year ended December 31, 2013 by assuming
      a risk-free interest rate of 1.71%, a dividend yield of nil, expected
      volatility of our share price of 98.00% and an expected life of the
      options of 5 years; and for options granted during the ten months ended
      December 31, 2012 by assuming a risk-free interest rate of 1.18%, a
      dividend yield of nil, expected volatility of our share price of 137.48% and an expected
      life of the options of 5 years.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

50

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| | (2) | The fiscal year ended December 31, 2012 is a ten-month
      period due to a change in year-end from February 28.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) | Ian Duncan was promoted to Chief Operating Officer
      effective September 1, 2014. Prior thereto, he was Vice President,
      Engineering since May 26, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (4) | Andrew Arthur was appointed Vice President, Exploration
      on July 5, 2012 earning an annual salary of $130,000. Prior thereto, Mr.
      Arthur entered a consulting agreement with us on January 15, 2012 and was
      paid remuneration of $750 per day for providing geological services on a
      part-time basis.                                                                                                                                                                                                                                                                                                                                                         
| | (5) | Ashley Ramsden-Wood was appointed Vice President,
      Engineering effective September 1, 2014 earning an annual salary of
      $140,000. Prior thereto, Ms. Ramsden-Wood entered a consulting agreement
      with us on June 25, 2012 and was paid remuneration of $600 per day for
      providing engineering services on a part-time basis. On March 1, 2013, the
      original consulting agreement was replaced with a new consulting agreement
      at which time she was paid remuneration of $10,000 per month on a
      part-time basis. Effective January 1, 2014, Ms. Ramsden-Woods consulting
      rate was increased to $10,700 per month on a part-time basis.
| | (6) | Don Simmons is also a director of our company, but he
      does not receive any additional compensation for his service as a
      director.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

Outstanding Option-Based Awards

The following table sets forth the particulars of all awards
for each executive officer outstanding as at December 31, 2014, including any
awards granted before the most recently completed fiscal year.

Option-based AwardsName
    Number of securities underlying
      unexercised options(#)
    Option **exercise
      price** ($)
    Option expiration date
    Value of unexercised
      in-the-money options(1)
      ($)Don Simmons
    250,000 50,000 250,000 150,000
      100,000 250,000 100,000(3)
    0.65 0.55 0.70 0.40 0.30 0.26
      0.25
    September 29, 2019 January 6, 2019
      February 7, 2017 May 25, 2016 December 23, 2015 September
      30, 2015 March 8, 2015
    - - - - 8,000 30,000
      13,000Ian Duncan
    50,000 50,000 175,000 100,000
      200,000
    0.65 0.55 0.70 0.40 0.30
    September 29, 2019 January 6, 2019
      February 7, 2017 May 25, 2016 January 27, 2016
    - - - - 16,000Dorlyn Evancic
    50,000 50,000 150,000 45,000
      100,000 60,000 45,000(3)
    0.65 0.55 0.70 0.40 0.30 0.26
      0.25
    September 29, 2019 January 6, 2019
      February 7, 2017 May 25, 2016 December 23, 2015 September
      30, 2015 March 8, 2015
    - - - - 8,000 7,200 5,850Andrew Arthur
    50,000 350,000 100,000
    0.55 0.61 0.70
    January 6, 2019 July 5, 2017 February 7,
      2017
    - - -Ashley Ramsden-Wood
    200,000 50,000 250,000
    0.65 0.55 0.50
    September 29, 2019 January 6, 2019 March
      8, 2018
    - - -


Notes:

| | (1) | Value is calculated based on the difference between the
      exercise price of the options and the closing price of the common shares
      on the TSX-V on December 31, 2014 of $0.38.                       
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Subsequent to the fiscal year ended December 31, 2014, a
      total of 475,000 options were granted to NEOs on January 29, 2015 with an
      exercise price of $0.24 and expiration date of January 29, 2020.
| | (3) | Subsequent to the fiscal year ended December 31, 2014,
      and prior to their expiry, all options with an expiry date of March 8,
      2015 were exercised.                                                 

51

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Stock Option Plan

The purpose of the Stock Option Plan is to assist in
attracting, retaining and motivating our directors, officers and employees and
to closely align the personal interests of such directors, officers and
employees with our interests and the interests of our shareholders. The
allocation of stock options under the Stock Option Plan is determined by our
Board of Directors upon recommendation from the Compensation/Nominating
Committee of our Board of Directors which, in determining such allocations,
considers such factors as previous grants to individuals, our overall
performance, share price, the role and performance of the individual in
question, the amount of time directed to our affairs and time expended in
serving on our committees.

Options are granted from time to time under the Stock Option
Plan as determined by our Board of Directors upon recommendation from the
Compensation/Nominating Committee of our Board of Directors, including options
granted to executive officers. Previous grants of options under the Stock Option
Plan are taken into account when the granting of new options is being
considered. There were no repricings of Stock Options under the Stock Option
Plan or otherwise during our most recently completed fiscal year ended December
31, 2014. We do not have any share-based awards in place.

The following information is intended as a summary of the terms
of the Stock Option Plan and is qualified in its entirety by the full text of
the Stock Option Plan.

- Number of Shares Reserved.The number of common shares that
  may be reserved for issuance under the Stock Option Plan will be 10% of the
  issued common shares at the time common shares are reserved for issuance as a
  result of the grant of a stock option, less any common shares reserved for
  issuance under stock options granted under share compensation arrangements
  other than the Stock Option Plan.
- Administration.The Stock Option Plan is to be administered
  by our Board of Directors or by a committee to which such authority is
  delegated by our Board of Directors from time to time.
- Option Holders.The Stock Option Plan provides that stock
  options may be issued to our employees, officers, directors and consultants or
  any of our subsidiaries, a company wholly-owned by such employee, to a
  Consultant Entity (as defined in the Stock Option Plan) of a consultant or to
  eligible tax accounts established by or for the consultant or employee under
  which he or she is the beneficiary.
- Board Discretion.The Stock Option Plan provides that,
  generally, the number of shares subject to each stock option, the exercise
  price, the expiry time, the extent to which such stock option is exercisable
  and other terms and conditions relating to such stock options shall be
  determined by our Board of Directors or any committee to which such authority
  is delegated by our Board of Directors from time to time.
- Maximum Term of Options.Stock options granted under the
  Stock Option Plan will be for a term not exceeding ten years from the date of
  grant.
- Maximum Options per Person.The number of common shares
  reserved for issuance to any one option holder pursuant to stock options
  granted under the Stock Option Plan during any twelve month period may not
  exceed 5% (or, in the case of a consultant, 2%) of our issued and outstanding
  common shares at the time of grant. The number of common shares reserved for
  issuance to any person who is engaged in investor relations activities is
  limited to an aggregate of 2% of our issued and outstanding common shares at
  the time of grant.
- Disinterested Shareholder Approval.Disinterested
  shareholder approval (as defined in the TSX- V corporate finance manual) is
  required for the grant to Insiders (as defined in the Stock Option Plan),
  within a 12 month period, of a number of stock options which, when added to
  the number of outstanding incentive stock options granted to Insiders within
  the previous 12 months, exceed 10% of our issued shares.
- No assignment.The stock options may not be assigned or
  transferred.

52

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- Termination Prior to Expiry.Generally, stock options must
  expire and terminate on a date stipulated by our Board of Directors or the
  committee appointed by our Board of Directors at the time of grant and, in any
  event, must terminate within a reasonable time, which may not exceed 12
  months, following the date on which the option holder ceases to be an
  employee, officer, director or consultant, subject to certain conditions as
  more fully described in the Stock Option Plan. If an option holder dies, the
  stock options of the deceased option holder will be exercisable by his or her
  legal representatives for a period not exceeding 12 months or the balance of
  the term of the stock options, whichever is shorter. If an option holder has a
  Disability (as defined in the Stock Option Plan), the stock options of the
  option holder with that Disability will be exercisable for a period not
  exceeding 12 months or the balance of the term of the stock options, whichever
  is shorter.
- Vesting. Subject to the discretion of our Board of Directors
  or the committee appointed by our Board of Directors, stock options granted
  under the terms of the Stock Option Plan will fully vest on the date of grant
  of such stock options. In accordance with the policies of the TSX-V, stock
  options issued to consultants performing investor relations must vest in
  stages over a minimum of twelve months with no more than one-quarter (1⁄4) of
  the stock options vesting in any three (3) month period.
- Hold Period. Any stock options granted under the terms of
  the Stock Option Plan where the exercise price is based on any discount to the
  market price (market price will be the closing trading price of our common
  shares on the day immediately preceding the date of the option grant, and may
  be less than this price if it is within the discounts permitted by the TSX-V
  and applicable regulatory authority) and all shares issued on the exercise of
  such stock options, if exercised prior to the expiration of the applicable
  four month TSX-V hold period, will be subject to a four month TSX-V hold
  period from the date the stock options are granted.
- Full Payment for Shares. We will not issue shares pursuant
  to stock options granted under the Stock Option Plan unless and until the
  shares have been fully paid for.
- Reduction of Exercise Price. The exercise price of stock
  options granted to Insiders may not be decreased without disinterested
  shareholder approval.
- TSXVs Rules and Policies Apply. In the event of an
  inconsistency between the terms of the Stock Option Plan and the rules and
  policies of the TSX-V and applicable the securities commissions, the rules and
  policies of the TSX-V and securities commissions will govern.
- Termination of Plan. Subject to all necessary regulatory
  approvals, our Board of Directors or the committee appointed by our Board of
  Directors may terminate or suspend the plan.

Securities Authorized for Issuance Under Equity
Compensation Plans

The following table sets forth details of our compensation
plans under which our equity securities were authorized for issuance at the end
of our most recently completed fiscal year.

Number of securities
      to be issued upon exercise of outstanding
      options, warrants and rights
    Weighted-average
      exercise price of outstanding options,
      warrants and rights
    Number of securities
      remaining available for future issuance under
      equity compensation plansStock Option Plan
    5,970,000
    $0.52
    1,566,850(1)


Note:

| | (1) | The Stock Option Plan reserves for issuance a maximum of
      10% of the 75,368,498 common shares outstanding at December 31,
    2014.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------

Termination and Change of Control Benefits

We have an executive employment agreement with each executive
officer which provides termination notice of twelve months without just cause,
including termination as a result of a change of control, for which each
executive officer would be compensated by an annual base salary of twelve months
plus the average annual bonus amount, if any, paid over the two years
immediately prior to termination, in addition to the vesting of all stock
options. Under a change of control, the executive employment agreements between
us and each executive officer state that the executive agrees to remain employed by us during the period
commencing with any act taken and any person, or the announcement of an
intention to take such act, which may result in a change of control and ending
with the final conclusion of all matters associated with such act or
announcement.

53

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Assuming an executive officer was terminated on December 31,
2014, based on annualized base salaries for the current executive officers as at
such time, the following table summarizes the estimated compensation to which
each current executive officer would have been entitled.

Name
    Termination without 
      just
      cause 
    ($)
    Termination with 
      change of
      control 
    ($)
    Termination for 
      cause 
    ($)Don Simmons
    260,000
    260,000
    NilIan Duncan
    190,000
    190,000
    NilDorlyn Evancic
    180,000
    180,000
    NilAndrew Arthur
    175,000
    175,000
    NilAshley Ramsden-Wood
    175,000
    175,000
    Nil


All stock options granted to NEOs immediately vest; however,
should an exercise of the stock option take place, the common shares are subject
to a hold period of four months plus one day from the day of grant. The value of
stock options held by each NEO at December 31, 2014 (based on the closing market
price of the common shares at December 31, 2014 of $0.38) was $51,000 for Mr.
Simmons, $16,000 for Mr. Duncan, $21,050 for Mr. Evancic, $Nil for Mr. Arthur,
and $Nil for Ms. Ramsden-Wood.

Pension, Retirement or Similar Benefits

We have no pension plans that provide for payments or benefits
to any director or executive officer at, following or in connection with
retirement. We also do not have any deferred compensation plans relating to any
director or executive officer. Accordingly, we have no amounts set aside or
accrued to provide pension, retirement or similar benefits.

C.                    
Board Practices

Term of Office

Each director holds office until the next annual general
meeting or until his office is earlier vacated in accordance with the articles
or with the provisions of the BCBCA. A director appointed or elected to fill a
vacancy on our Board of Directors also holds office until the next annual
general meeting. The directors were elected at our Annual General and Special
Meeting of the shareholders held on June 6, 2014. The term of office of the
officers expires at the discretion of the directors.

Service Contracts

See the information under the heading Item 6.B.  Termination
and Change of Control Benefits for particulars of Don Simmons executive
employee agreement with us. Other than as disclosed in this Form 20-F, we do not
have any service contracts with directors which provide for benefits upon
termination of employment.

Committees of the Board

Our Board of Directors has four committees: Corporate
Governance Committee, Compensation/Nominating Committee, Reserves Committee, and
Audit Committee.

Corporate Governance Committee

The Corporate Governance Committee assists our Board of
Directors in the oversight of our corporate governance policies and
responsibilities for good governance practices. The following directors serve on
our Corporate Governance Committee: Frank Borowicz (Chairman), Charles
OSullivan and Don Simmons.

54

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The mandate of the Corporate Governance Committee is to:

- Assist our Board of Directors in fulfilling their oversight
  responsibilities with respect to good governance practices as defined in
  National Policy 58-201 Corporate Governance Guidelinesand National
  Instrument 58-101 Disclosure of Corporate Governance Practices.
- Meet annually and at the request of the Corporate Governance Committee
  Chairman.
- Annually review and amending (if required) our corporate policies, and
  making recommendations to our Board of Directors.
- Annually review the corporate governance disclosure in our information
  circular for recommendation to our Board of Directors.

Compensation/Nominating Committee

The Compensation/Nominating Committee assists our Board of
Directors in the oversight of our recruitment, retention and motivation of
directors, officers and employees in regard to the competitive conformity of
compensation and corporate objectives. The Compensation/Nominating Committee
also assists our Board of Directors in the oversight of recruiting new
directors, as required. The following directors serve on our
Compensation/Nominating Committee: Charles OSullivan (Chairman), Frank Borowicz
and Bruce McIntyre.

The mandate of the Compensation/Nominating Committee is to:

- Assist our Board of Directors in fulfilling their oversight
  responsibilities with respect to cash and stock compensation of new and
  existing executives and employees, and nominating new directors, as required.
- Approve stock option grants for employees and consultants.
- Approve cash compensation and stock option grants for officers and
  directors to recommend to our Board of Directors for approval.
- Meet annually and at the request of the Compensation/Nominating Committee
  Chairman.
- Review executive compensation packages of our peer group.
- Annually review the Statement of Executive Compensation disclosure in our
  Information Circular for recommendation to our Board of Directors.
- Identify the competencies and skills represented by the directors and make
  recommendations to our Board of Directors.
- Recommend director nominees to shareholders at our annual general meeting.

Reserves Committee

The Reserves Committee assists our Board of Directors in the
oversight of the integrity in our petroleum and natural gas reserves. The
following directors serve on our Reserves Committee: Bruce McIntyre, (Chairman),
Don Simmons, Gregg Vernon, and Richard Wyman.

The mandate of the Reserves Committee is to:

- Assist our Board of Directors in fulfilling their oversight
  responsibilities with respect to the annual review of our petroleum and
  natural gas reserves.
- Meet annually to review and approve the year-end independent reserves
  evaluation and corresponding disclosures as prepared by management under
  applicable laws.
- Annually review the Statement of Reserves and Other Oil and Natural Gas
  Informationin our Annual Information Form for recommendation to our Board
  of Directors.

55

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Audit Committee

The Audit Committee assists our Board of Directors in the
oversight of our integrity in financial reporting as outlined in National
Instrument 52-110 Audit Committees (NI 52-110). The Audit Committee
consists of no less than three directors, each of whom is financially literate
and independent as defined under NI 52-110, and is annually appointed by our
Board of Directors. The Chair of the Audit Committee is appointed by our Board
of Directors at the same time as the member appointment. The following directors
serve on our Audit Committee: Bruce McIntyre (Chairman), Frank Borowicz, Gregg
Vernon and Richard Wyman.

The mandate of the Audit Committee is to:

- Assist our Board of Directors in fulfilling their oversight
  responsibilities with respect to the review of financial statements and other
  relevant public disclosures, compliance with legal and regulatory requirements
  relating to financial reporting, the external auditors qualifications and
  independence, and the performance of the internal audit function and the
  external auditors.
- Meet quarterly to review and approve the quarterly financial statements
  and managements discussion and analysis for recommendation to our Board of
  Directors.
- Meet annually to review and approve the audited annual financial
  statements and managements discussion and analysis for recommendation to our
  Board of Directors.
- Annually review the performance of the external auditors.
- Nominating the external auditors for recommendation to our shareholders at
  the annual general meeting of the shareholders.
- Advise our Board of Directors on the remuneration of the external auditors
  based on the time required to complete the audit and preparation of the
  audited annual financial statements, and the difficulty of the audit and
  performance of the standard auditing procedures under generally accepted
  auditing standards, Generally Accepted Accounting Principles of Canada and
  IFRS and the Public Company Accounting Oversight Board standards.

External Auditors

Our external auditors are the independent representatives of
the shareholders, yet are also accountable to our Board of Directors and the
Audit Committee. The external auditors complete their audit procedures and
reviews with professional independence, free from any undue interference from
management or directors. The Audit Committee directs and ensures that the
management fully co-operates with the external auditors in the course of
carrying out their professional duties. The Audit Committee will have access to
direct communications with the external auditors, if required.

The external auditors are prohibited from providing any
non-audit services to us, without the written consent of the Audit Committee
unless such non-audit services are De MinimusNon-Audit Services as
outlined in section 2.4 of NI 52-110. In determining whether the external
auditors will be granted permission to provide non-audit services, the Audit
Committee is to consider that the benefits to us from the provision of such
services, outweighs the risk of any compromise to or loss of the independence of
the external auditors in carrying out their auditing mandate.

Notwithstanding the above non-audit services, the external
auditors are prohibited at all times from carrying out any of the following
services, while they are appointed as our external auditors:

- Act as our agent for the sale of all or substantially all of the
  undertaking of Hemisphere; and
- Perform any non-audit consulting work for any of our directors or senior
  officers in their personal capacity, but not as a director, officer or insider
  of any other entity that is not associated or related to us.

The Audit Committee has the power to terminate the services of
the external auditors, with or without the approval of our Board of Directors,
acting reasonably.

Annual Review

The Corporate Governance Committee annually reviews the Audit
Committee Charter and recommends any amendments to the Board of Directors for
approval.

56

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D.                    
Employees

As at December 31, 2014, we had eight full-time head office
employees and one full-time field employee. Additionally, we had five part-time
consultants and two full-time field contractors.

E.                    
Share Ownership

Shareholdings of Directors and Executives

The shareholdings of common shares of our directors and
executive officers and the percent of common shares outstanding on a diluted
basis as at April 28, 2015 are set forth in the following table.

Name of Beneficial Owner
    Amount and Nature of Beneficial
      **Ownership**
    Percent of ClassCharles OSullivan
    1,816,600(1)
    2.20%Frank Borowicz
    880,500(2)
    1.07%Bruce McIntyre
    506,000(3)
    0.61%Gregg Vernon
    525,000(4)
    0.64%Richard Wyman
    827,700(5)
    1.00%Don Simmons
    2,402,500(6)
    2.91%Dorlyn Evancic
    830,500(7)
    1.00%Andrew Arthur
    780,000(8)
    0.94%Ian Duncan
    993,026(9)
    1.20%Ashley Ramsden-Wood
    650,000(10)
    0.79%Total Directors/Executives
    10,211,826
    12.35%


Notes:

| | (1)  | Of these shares, 1,591,600 are represented by common
      shares and 225,000 are represented by vested stock options.                                                                                                                                       
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2)  | Of these shares, 605,500 are represented by common shares
      and 275,000 are represented by vested stock options.                                                                                                                                         
| | (3)  | Of these shares, 231,000 are represented by common shares
      and 275,000 are represented by vested stock options.                                                                                                                                         
| | (4)  | Of these shares, 250,000 are represented by common shares
      and 275,000 are represented by vested stock options.                                                                                                                                         
| | (5)  | Of these shares, 577,700 are represented by common shares
      and 250,000 are represented by vested stock options.                                                                                                                                         
| | (6)  | Of these shares, 1,202,500 are represented by common
      shares and 1,200,000 are represented by vested stock options.                                                                                                                                     
| | (7)  | Of these shares, 250,500 are represented by common shares
      and 580,000 are represented by vested stock options.                                                                                                                                         
| | (8)  | Of these shares, 180,000 are represented by common shares
      and 600,000 are represented by vested stock options. 100,000 of these
      shares are vested stock options owned by Caerleon Resources Inc., a
      private company owned by Andrew Arthur.
| | (9)  | Of these shares, 293,026 are represented by common shares
      and 700,000 are represented by vested stock options.                                                                                                                                         
| | (10) | Of these shares, 50,000 are represented by common shares
      and 600,000 are represented by vested stock
options.                                                                                                                                          

All percentages are based on 82,663,498 fully diluted shares
outstanding as of April 28, 2015.

57

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Stock Options Outstanding

Our directors and executive officers to whom outstanding stock
options have been granted, the number of common shares subject to such options,
the price per option, the grant date and the expiration date are set forth in
the following table as at April 28, 2015. All options vest immediately; however,
if exercised, the common shares are subject to a four-month plus one-day hold
period from the date of grant.

Name
    Options held (#)
    Price per option ($)
    Grant date
    Expiration dateDon Simmons
    150,000 250,000 50,000 250,000
      150,000 100,000 250,000
    0.24 0.65 0.55 0.70 0.40
      0.30 0.26
    January 29, 2015 September 29, 2014
      January 6, 2014 February 7, 2012 May 25, 2011 December 23,
      2010 September 30, 2010
    January 29, 2015 September 29, 2019
      January 6, 2019 February 7, 2017 May 25, 2016 December 23,
      2015 September 30, 2015Ian Duncan
    125,000 50,000 50,000 175,000
      100,000 200,000
    0.24 0.65 0.55 0.70 0.40
      0.30
    January 29, 2015 September 29, 2014
      January 6, 2014 February 7, 2012 May 25, 2011 January 27,
      2011
    January 29, 2020 September 29, 2019
      January 6, 2019 February 7, 2017 May 25, 2016 January 27,
      2016Dorlyn Evancic
    125,000 50,000 50,000 150,000
      45,000 100,000 60,000
    0.24 0.65 0.55 0.70 0.40
      0.30 0.26
    January 29, 2015 September 29, 2014
      January 6, 2014 February 7, 2012 May 25, 2011 December 23,
      2010 September 30, 2010
    January 29, 2020 September 29, 2019
      January 6, 2019 February 7, 2017 May 25, 2016 December 23,
      2015 September 30, 2015Andrew Arthur
    100,000 50,000 350,000 100,000
    0.24 0.55 0.61 0.70
    January 29, 2015 January 6, 2014 July
      5, 2012 February 7, 2012
    January 29, 2020 January 6, 2019 July
      5, 2017 February 7, 2017Ashley Ramsden-Wood
    100,000 200,000 50,000 250,000
    0.24 0.65 0.55 0.50
    January 29, 2015 September 29, 2014
      January 6, 2014 March 8, 2013
    January 29, 2020 September 29, 2019
      January 6, 2019 March 8, 2018Frank S. Borowicz
    50,000 25,000 25,000 50,000
      45,000 50,000 30,000
    0.24 0.65 0.55 0.70 0.40
      0.30 0.26
    January 29, 2015 September 29, 2014
      January 6, 2014 February 7, 2012 May 25, 2011 December 23,
      2010 September 30, 2010
    January 29, 2020 September 29, 2019
      January 6, 2019 February 7, 2017 May 25, 2016 December 23,
      2015 September 30, 2015Bruce G. McIntyre
    50,000 25,000 25,000 50,000
      45,000 50,000 30,000
    0.24 0.65 0.55 0.70 0.40
      0.30 0.26
    January 29, 2015 September 29, 2014
      January 6, 2014 February 7, 2012 May 25, 2011 December 23,
      2010 September 30, 2010
    January 29, 2020 September 29, 2019
      January 6, 2019 February 7, 2017 May 25, 2016 December 23,
      2015 September 30, 2015Charles N. OSullivan
    50,000 25,000 50,000 45,000
    0.24 0.55 0.70 0.40
    January 29, 2015 January 6, 2014
      February 7, 2012 May 25, 2011
    January 29, 2020 January 6, 2019
      February 7, 2017 May 25, 201625,000 30,000
    0.30 0.26
    December 23, 2010 September 30, 2010
    December 23, 2015 September 30, 2015


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Gregg K. Vernon
    50,000 25,000 25,000 50,000
      45,000 50,000 30,000
    0.24 0.65 0.55 0.70 0.40
      0.30 0.26
    January 29, 2015 September 29, 2014
      January 6, 2014 February 7, 2012 May 25, 2011 December 23,
      2010 September 30, 2010
    January 29, 2020 September 29, 2019
      January 6, 2019 February 7, 2017 May 25, 2016 December 23,
      2015 September 30, 2015Richard M. Wyman
    50,000 200,000
    0.24 0.61
    January 29, 2015 October 7, 2014
    January 29, 2020 October 7, 2019Total Directors/Executive
      Officers
    4,980,000


Our employees are eligible to participate in our Stock Option
Plan. A summary of the some of the relevant parts of the Stock Option Plan is
given under the heading Item 6.B.  Stock Option Plan.

ITEM 7.                    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.                    Major Shareholders

To the best of our knowledge, there are no persons or company
who beneficially own, directly or indirectly, or exercise control or direction
over, securities carrying more than 5% of the voting rights attached to any
class of our voting securities, except for Alpha Capital, which owns 5,290,500
shares representing 7.0% of the voting rights of our common shares as of April
20, 2015.

The voting rights of our major shareholders do not differ from
the voting rights of holders of the common shares who are not our major
shareholders.

To the best of our knowledge, there has been no significant
change in the percentage ownership held by any major shareholders during the
past three years.

As of March 31, 2015, our registrar and transfer agent reported
we have 49 registered holders of our shares who are U.S. residents, with
combined holdings of 1,175,450 common shares.

To the extent of our knowledge, we are not directly or
indirectly owned or controlled by another corporation, any foreign government,
or any other natural or legal person, severally or jointly.

As of the date of this Form 20-F, there were no arrangements
known to us which may, at a subsequent date, result in a change of control.

B.                    Related Party Transactions

Other than in the ordinary course of business, since the
beginning of the preceding three financial years, there have been no
transactions or loans between us and:

|(a) | enterprises that directly or indirectly through one or
      more intermediaries, control or are controlled by, or are under common
      control with, us;                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                          
|(b) | associates, meaning unconsolidated enterprises in which
      we have a significant influence or which have significant influence over
      us;                                         
|    |                                                                                                                                                                                          
|(c) | individuals owning, directly or indirectly, an interest
      in our voting power that gives them significant influence over us, and
      close members of any such individuals family;

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|(d) | key management personnel, that is, those persons having
      authority and responsibility for planning, directing and controlling our
      activities, including our directors and senior management and close
      members of such individuals families; and                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                
|(e) | enterprises in which a substantial interest in the voting
      power is owned, directly or indirectly, by any person described in (c) or
      (d) or over which such a person is able to exercise significant influence,
      including enterprises owned by our directors or major shareholders and
      enterprises that have a member of our key management in
  common.

Compensation

For information regarding compensation for our directors and
senior management, please see the information under the heading Item 6.B.
Compensation.

C.                    
Interests of Experts and Counsel

Not applicable.

ITEM
8.                    
FINANCIAL INFORMATION

A.                    
Financial Statements and Other Financial Information

Our financial statements are stated in Canadian dollars and are
prepared in accordance with IFRS, as issued by the IASB, the application of
which, in our case, conforms in all material respects for the periods presented
with the United States generally accepted accounting principles.

Included in this Form 20-F are our audited financial statements
for the years ended December 31, 2014 and December 31, 2013, which comprise the
statements of financial position as at December 31, 2014, December 31, 2013 and
January 1, 2013, and the statements of loss and comprehensive loss, changes in
shareholders equity and cash flows for the years ended December 31, 2014 and
December 31, 2013 and the ten months ended December 31, 2012, the independent
auditors report by Smythe Ratcliffe LLP, Chartered Accountants, a summary of
significant accounting policies and the notes to the audited financial
statements.

These financial statements can be found under the heading Item
18. Financial Statements.

Export Sales

Export sales do not constitute any portion of our sales.

Legal Proceedings

To our knowledge, there have not been any legal or arbitration
proceedings, including those relating to bankruptcy, receivership or similar
proceedings, those involving any third party, and governmental proceedings
pending or known to be contemplated, which may have, or have had in the recent
past, significant effect our financial position or profitability.

Also, to our knowledge, there have been no material proceedings
in which any director, any member of senior management, or any of our affiliates
is either a party adverse to us or our subsidiaries or has a material interest
adverse to us or our subsidiaries.

Policy on Dividend Distributions

We have not declared or paid any dividends since our
incorporation. Payments of dividends in the future will be dependent on, among
other things, our cash flow, results of operations and financial condition, the
need for funds to finance ongoing operations and other considerations, as our
Board of Directors considers relevant.

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B.                    
Significant Changes

None.

ITEM
9.                    
THE OFFER AND LISTING

A.                    
Offer and Listing Details

Our common shares are listed for trading on the TSX-V under the
symbol HME. Our high and low market prices of the common shares on the TSX-V
for the five most recent full financial years, for each full financial quarter
for the two most recent full financial years and for each of the most recent six
months are set forth in the following table.

TSX-V ($)**High**
    **Low**Year endedDecember 31, 2014
    0.85
    0.31December 31, 2013
    0.69
    0.40December 31, 2012(1)
    0.85
    0.46February 29, 2012
    0.86
    0.34February 28, 2011
    0.42
    0.17Quarter endedMarch 31, 2015
    0.43
    0.23December 31, 2014
    0.66
    0.31September 30, 2014
    0.79
    0.63June 30, 2014
    0.83
    0.67March 31, 2014
    0.85
    0.49December 31, 2013
    0.69
    0.45September 30, 2013
    0.68
    0.42June 30, 2013
    0.55
    0.40March 31, 2013
    0.61
    0.40Month endedMarch 2015
    0.40
    0.32February 2015
    0.43
    0.26January 2015
    0.40
    0.23December 2014
    0.50
    0.31November 2014
    0.55
    0.47October 2014
    0.66
    0.48


Note:

| | (1) | Due to our fiscal year-end change, this fiscal year
      represents a ten month period.
| | --- | ----------------------------------------------------------------------------------------

On April 28, 2015, the closing price of our common shares on
the TSX-V was $0.305 per common share.

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Transfers of Common Shares

Our common shares, no par value, are in registered form and the
transfer of our common shares is managed by our transfer agent in Canada,
Computershare Investor Services Inc., located at 510 Burrard Street, Vancouver,
BC V6C 3A8, (Tel: 800-564-6253).

B.                    
Plan of Distribution

Not applicable.

C.                    
Markets

Our common shares, no par value, are currently traded on the
TSX-V under the symbol HME.

There is currently no market for the common shares in the
United States, and there is no assurance that any will develop or, if developed,
will be maintained.

D.                    
Selling Shareholders

Not applicable.

E.                    
Dilution

Not applicable.

F.                    
Expenses of the Issue

Not applicable.

ITEM
10.                    
ADDITIONAL INFORMATION

A.                    
Share Capital

Not applicable.

B.                    
Memorandum and Articles of Association

Incorporation

We are incorporated under the BCBCA. Our British Columbia
incorporation number is BC00172034.

Objects and Purposes of Our Company

The articles do not contain a description of our objects and
purposes.

Voting on Certain Proposal, Arrangement, Contract or
Compensation by Directors

Other than as disclosed below, the articles do not restrict
directors power to (a) vote on a proposal, arrangement or contract in which the
directors are materially interested or (b) to vote compensation to themselves or
any other members of their body in the absence of an independent quorum.

The BCBCA does, however, contain restrictions in this regard.
The BCBCA provides that a director who holds a disclosable interest in a
contract or transaction into which we have entered or proposes to enter is not
entitled to vote on any directors resolution to approve that contract or
transaction, unless all the directors have a disclosable interest in that
contract or transaction, in which case any or all of those directors may vote on
such resolution. A director who holds a disclosable interest in a contract or
transaction into which we have entered or proposes to enter and who is present
at the meeting of directors at which the contract or transaction is considered
for approval may be counted in the quorum at the meeting whether or not the director votes
on any or all of the resolutions considered at the meeting. A director or senior
officer generally holds a disclosable interest in a contract or transaction if
(a) the contract or transaction is material to us; (b) we have entered, or
proposed to enter, into the contract or transaction, and (c) either (i) the
director or senior officer has a material interest in the contract or
transaction or (ii) the director or senior officer is a director or senior
officer of, or has a material interest in, a person who has a material interest
in the contract or transaction. A director or senior officer does not hold a
disclosable interest in a contract or transaction merely because the contract or
transaction relates to the remuneration of the director or senior officer in
that persons capacity as director, officer, employee or agent of our company or
of an affiliate of our company.

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Borrowing Powers of Directors

The articles provide that we, if authorized by our Board of
Directors, may:

- borrow money in the manner and amount, on the security, from the sources
  and on the terms and conditions that they consider appropriate;
- issue bonds, debentures and other debt obligations either outright or as
  security for any of our liabilities or obligations or any other person and at
  such discounts or premiums and on such other terms as they consider
  appropriate;
- guarantee the repayment of money by any other person or the performance of
  any obligation of any other person; and
- mortgage, charge, whether by way of specific or floating charge, grant a
  security interest in, or give other security on, the whole or any part of our
  present and future assets and our undertaking.

Qualifications of Directors

Under the articles, a director is not required to hold a share
in our capital as qualification for his or her office but must be qualified as
required by the BCBCA to become, act or continue to act as a director.

Share Rights

Please see the summary of our authorized capital under the
heading Item 10.A. Share Capital  Common Shares.

Procedures to Change the Rights of Shareholders

The articles state that we may by resolution of our directors:
(a) create one or more classes or series of shares or, if none of the shares of
a class or series of shares are allotted or issued, eliminate that class or
series of shares; (b) increase, reduce or eliminate the maximum number of shares
that we are authorized to issue out of any class or series of shares or
establish a maximum number of shares that we are authorized to issue out of any
class or series of shares for which no maximum is established; (c) if we are
authorized to issue shares of a class of shares with par value: (i) decrease the
par value of those shares, (ii) if none of the shares of that class of shares
are allotted or issued, increase the par value of those shares, (iii) subdivide
all or any of our unissued or fully paid issued shares with par value into
shares of smaller par value, or (iv) consolidate all or any of our unissued or
fully paid issued shares with par value into shares of larger par value; (d)
subdivide all or any of our unissued or fully paid issued shares without par
value; (e) change all or any of our unissued or fully paid issued shares with
par value into shares without par value or all or any of our unissued shares
without par value into shares with par value; (f) alter the identifying name of
any of our shares; (g) consolidate all or any of our unissued or fully paid
issued shares without par value; or (h) otherwise alter our shares or authorized
share structure when required or permitted to do so by the BCBCA.

Meetings

Each director holds office until the next annual general
meeting or until his office is earlier vacated in accordance with the articles
or with the provisions of the BCBCA. A director appointed or elected to fill a
vacancy on our Board of Directors also holds office until the next annual
general meeting.

The articles provide that the annual meetings of shareholders
must be held at such time in each calendar year and not more than 15 months
after the last annual general meeting and at such place as our Board of
Directors may from time to time determine. The directors may, at any time, call
a meeting of the shareholders.

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The holders of not less than five percent of our issued shares
that carry the right to vote at a meeting may requisition our directors to call
a meeting of shareholders for the purposes stated in the requisition.

Under the articles, the quorum for the transaction of business
at a meeting of our shareholders is one or more persons, present in person or by
proxy.

The articles state that in addition to those persons who are
entitled to vote at a meeting of the shareholders, the only other persons
entitled to be present at the meeting are our directors, our president (if any),
our secretary (if any), our lawyer or auditor, any persons invited to be present
at the meeting by our directors or by the chair of the meeting and any person
entitled or required under the BCBCA or the articles to be present at the
meeting.

Limitations on Ownership of Securities

Except as provided in the Investment Canada Act
(Canada), there are no limitations specific to the rights of non-Canadians to
hold or vote the common shares under the laws of Canada or British Columbia, or
in the our charter documents.

Change in Control

There are no provisions in the articles or in the BCBCA that
would have the effect of delaying, deferring or preventing a change in our
control, and that would operate only with respect to a merger, acquisition or
corporate restructuring involving us or our subsidiaries.

Ownership Threshold

The articles or the BCBCA do not contain any provisions
governing the ownership threshold above which shareholder ownership must be
disclosed. Securities legislation in Canada, however, requires that we disclose
in our information circular for our annual general meeting, holders who
beneficially own more than 10% of our issued and outstanding shares. Most state
corporation statutes do not contain provisions governing the threshold above
which shareholder ownership must be disclosed. Upon the effectiveness of this
Form 20-F, we expect that the United States federal securities laws will require
us to disclose, in an annual report on Form 20-F, holders who own 5% or more of
our issued and outstanding shares.

C.          
Material Contracts

There are no other contracts, other than those disclosed in
this Form 20-F and those entered into in the ordinary course of our business,
that are material to us and which were entered into in the most recently
completed fiscal year or which were entered into before the most recently
completed fiscal year but are still in effect as of the date of this Form
20-F:

- Stock Option Plan.The Stock Option Plan was last approved
  by our shareholders on June 6, 2014. See the discussion under the heading
  Item 6.B.  Stock Option Plan.
- Shareholders Rights Plan Agreement.The Shareholders Rights
  Plan Agreement sets forth the terms of the Shareholder Rights Plan, which was
  last approved by our shareholders and extended for two years at our Annual
  General and Special Meeting Held on June 6, 2014. See the discussion under the
  heading Item 6.B.  Shareholder Rights Plan.
- Advance Notice Policy.The Advance Notice Policy was
  approved by our Board of Directors on March 13, 2014 and was subsequently
  ratified by our shareholders on June 6, 2014. See the discussion under the
  heading Item 4.A.  Three Year History for the Fiscal year ended December 31,
  2014.
- Demand Operating Credit Facility.We have a demand
  operating credit facility in the amount of $15,000,000 with ATB under a
  commitment letter dated September 25, 2013, as amended effective June 23, 2014
  and November 28, 2014. The demand operating credit facility is secured by a
  general security agreement and a floating charge on all our lands. The demand
  operating credit facility bears interest at ATBs prime rate plus 1.75% as
  well as a standby charge for any undrawn funds.
- Executive Employment Agreement with Don Simmons.We
  entered into an executive employment agreement with Don Simmons effective
  September 1, 2014 pursuant to which he agreed to serve as our President and
  Chief Executive Officer.

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- Executive Employment Agreement with Dorlyn Evancic.We entered into an executive employment agreement with Dorlyn Evancic
  effective September 1, 2014 pursuant to which he agreed to serve as our Chief
  Financial Officer.
- Executive Employment Agreement with Ian Duncan.We
  entered into an executive employment agreement with Ian Duncan effective
  September 1, 2014 pursuant to which he agreed to serve as our Chief Operating
  Officer.
- Executive Employment Agreement with Andrew Arthur.We
  entered into an executive employment agreement with Andrew Arthur effective
  September 1, 2014 pursuant to which he agreed to serve as our Vice President,
  Exploration.
- Executive Employment Agreement with Ashley Ramsden-Wood.We entered into an executive employment agreement with Ashley Ramsden-Wood
  effective September 1, 2014 pursuant to which she agreed to serve as our Vice
  President, Engineering.

D.          
Exchange Controls

There are no government laws, decrees or regulations in Canada
that restrict the export or import of capital or that affect the remittance of
dividends, interest or other payments to non-resident holders of the common
shares. Any remittances of dividends to U.S. residents and to other
non-residents are, however, subject to withholding tax. See the information
under the heading Item 10.E. Taxation.

There are no limitations under the laws of Canada or in our
organizing documents on the right of foreigners to hold or vote our securities,
except that the Investment Canada Act may require review and approval by
the Minister of Industry (Canada) of certain acquisitions of our control by a
non-Canadian. The threshold for acquisitions of control is generally defined
as being one-third or more of our voting shares. If the investment is
potentially injurious to national security it may be subject to review under the
Investment Canada Act notwithstanding the percentage interest acquired or amount
of the investment. Non-Canadian generally means an individual who is not a
Canadian citizen, or a corporation, partnership, trust or joint venture that is
ultimately controlled by non-Canadians.

E.          
Taxation

Certain Canadian Federal Income Taxation Considerations

The following summarizes the principal Canadian federal income
tax consequences applicable to the holding and disposition of our common shares
by a holder who, for purposes of the Income Tax Act (Canada) (the Tax Act) and
the Canada-U.S. Tax Convention (as defined below under Certain United States
Federal Income Tax Considerations), is, or is deemed to be, resident in the
United States, holds the common shares as capital property and does not use or
hold the common shares in the course of carrying on a business in Canada (a
Holder). The common shares will generally be considered to be capital property
unless the Holder holds the common shares in the course of carrying on a
business, or acquires the common shares in a transaction or transactions
considered to be an adventure in the nature of trade.

This summary is based on the current provisions of the Tax Act,
the regulations thereunder, all amendments thereto publicly proposed by the
government of Canada, the published administrative practices of the Canada
Revenue Agency and the current provisions of the Canada-U.S. Tax Convention.
This summary does not otherwise take into account or anticipate any changes in
law, whether by way of legislative, judicial or administrative action or
interpretation, nor does it address any provincial, territorial or foreign
(including without limitation, any United States) tax considerations.

This summary is of a general nature only and it is not
intended to be, nor should it be construed to be, legal or tax advice to any
particular Holder. Accordingly, Holders are urged to consult with their own tax
advisors about the specific tax consequences of acquiring, holding and disposing
of common shares.

A Holder will be liable to pay a Canadian withholding tax on
every dividend that is or is deemed to be paid or credited to the Holder on the
Holders common shares. The rate of withholding tax under the Tax Act is 25% of
the gross amount of the dividend paid. However, the Canada-U.S. Tax Convention
will reduce that withholding tax rate, provided the Holder is eligible for
benefits under the Canada-U.S. Tax Convention. Where applicable, the general
rate of withholding tax under the Canada-U.S. Tax Convention will be 15% of the
gross amount of the dividend, but if the Holder is a company that owns at least
10% of the voting stock of our company, the rate of withholding tax will be reduced to 5%. We will be required to withhold the
applicable tax from the dividend payable to the Holder and to remit that tax to
the Receiver General for Canada on account of the Holder. Not all persons who
are residents of the United States will qualify for benefits under the
Canada-U.S. Tax Convention. Holders are advised to consult their own tax
advisors in this regard.

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A Holder will generally not be subject to tax under the Tax Act
in respect of a capital gain realized on the disposition or deemed disposition
of a common share, unless the common share constitutes taxable Canadian
property to the Holder for purposes of the Tax Act. Provided that the common
shares are listed on a designated stock exchange for purposes of the Tax Act
(which includes the TSX) at the time of disposition, the common shares will
generally not constitute taxable Canadian property to a Holder unless, at any
time during the 60-month period immediately preceding the disposition (i) the
Holder, together with persons with whom the Holder does not deal at arms
length for the purposes of the Tax Act, owned 25% or more of the issued shares
of any class of our shares and, as such time, (ii) more than 50% of the fair
market value of the common shares was derived directly or indirectly from one or
a combination of real or immovable property situated in Canada, Canadian
resource properties or timber resource properties (as such terms are defined
in the Tax Act), or options or interests in respect of any such properties.

Even if the common shares are taxable Canadian property to a
Holder, any taxable capital gain resulting from the disposition of such shares
will not be included in computing the Holders income for the purposes of the
Tax Act if the shares constitute treaty protected property for the purpose of
the Tax Act.

Provided the common shares are listed at the time of
disposition on the TSX or other recognized stock exchange for purposes of the
Tax Act, a Holder who disposes of common shares will not be required to satisfy
the obligations imposed under Section 116 of the Tax Act and, as such, the
purchaser of such shares will not be required to withhold any amount on the
purchase price paid.

Holders whose common shares may constitute taxable Canadian
property should consult their own tax advisors.

Certain United States Federal Income Tax Considerations

The following is a general summary of certain material U.S.
federal income tax considerations applicable to a U.S. Holder (as defined below)
arising from and relating to the acquisition, ownership and disposition of our
common shares.

This summary is for general information purposes only and does
not purport to be a complete analysis or listing of all potential U.S. federal
income tax considerations that may apply to a U.S. Holder arising from and
relating to the acquisition, ownership, and disposition of our common shares. In
addition, this summary does not take into account the individual facts and
circumstances of any particular U.S. Holder that may affect the U.S. federal
income tax consequences to such U.S. Holder, including without limitation
specific tax consequences to a U.S. Holder under an applicable tax treaty.
Accordingly, this summary is not intended to be, and should not be construed as,
legal or U.S. federal income tax advice with respect to any U.S. Holder. This
summary does not address the U.S. federal alternative minimum, U.S. federal
estate and gift, U.S. state and local, and foreign tax consequences to U.S.
Holders of the acquisition, ownership, and disposition of our common shares. In
addition, except as specifically set forth below, this summary does not discuss
applicable tax reporting requirements. Each prospective U.S. Holder should
consult its own tax advisor regarding the U.S. federal, U.S. federal alternative
minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax
consequences relating to the acquisition, ownership, and disposition of our
common shares.

No legal opinion from U.S. legal counsel or ruling from the
Internal Revenue Service (the IRS) has been requested, or will be obtained,
regarding the U.S. federal income tax consequences of the acquisition,
ownership, and disposition of our common shares. This summary is not binding on
the IRS, and the IRS is not precluded from taking a position that is different
from, and contrary to, the positions taken in this summary. In addition, because
the authorities on which this summary are based are subject to various
interpretations, the IRS and the U.S. courts could disagree with one or more of
the conclusions described in this summary.

Scope of this Summary

Authorities

This summary is based on the Internal Revenue Code of 1986, as
amended (the Code), Treasury Regulations (whether final, temporary, or
proposed), published rulings of the IRS, published administrative positions of
the IRS, the Convention Between Canada and the United States of America with
Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended
(the Canada-U.S. Tax Convention), and U.S. court decisions that are applicable
and, in each case, as in effect and available, as of the date of this document.
Any of the authorities on which this summary is based could be changed in a
material and adverse manner at any time, and any such change could be applied on
a retroactive or prospective basis which could affect the U.S. federal income
tax considerations described in this summary. This summary does not discuss the
potential effects, whether adverse or beneficial, of any proposed
legislation.

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U.S. Holders

For purposes of this summary, U.S. Holder means a beneficial
owner of our common shares that is for U.S. federal income tax purposes:

- an individual who is a citizen or resident of the United States;
- a corporation (or other entity treated as a corporation for U.S. federal
  income tax purposes) organized under the laws of the United States, any state
  thereof or the District of Columbia;
- an estate whose income is subject to U.S. federal income taxation
  regardless of its source; or
- a trust that (1) is subject to the primary supervision of a court within
  the United States and the control of one or more U.S. persons for all
  substantial decisions or (2) has a valid election in effect under applicable
  Treasury Regulations to be treated as a U.S. person.

U.S. Holders Subject to Special U.S. Federal Income Tax
Rules Not Addressed

This summary does not address the U.S. federal income tax
considerations applicable to U.S. Holders that are subject to special provisions
under the Code, including, but not limited to, the following U.S. Holders that:
(a) are tax-exempt organizations, qualified retirement plans, individual
retirement accounts, or other tax-deferred accounts; (b) are financial
institutions, underwriters, insurance companies, real estate investment trusts,
or regulated investment companies; (c) are broker-dealers, dealers, or traders
in securities or currencies that elect to apply a mark-to-market accounting
method; (d) have a functional currency other than the U.S. dollar; (e) own our
common shares as part of a straddle, hedging transaction, conversion
transaction, constructive sale, or other arrangement involving more than one
position; (f) acquired our common shares in connection with the exercise of
employee stock options or otherwise as compensation for services; (g) hold our
common shares other than as a capital asset within the meaning of Section 1221
of the Code (generally, property held for investment purposes); or (h) own, have
owned or will own (directly, indirectly, or by attribution) 10% or more of the
total combined voting power of our outstanding shares. This summary also does
not address the U.S. federal income tax considerations applicable to U.S.
Holders who are: (a) U.S. expatriates or former long-term residents of the U.S.;
(b) persons that have been, are, or will be a resident or deemed to be a
resident in Canada for purposes of the Income Tax Act (Canada) (the Tax Act);
(c) persons that use or hold, will use or hold, or that are or will be deemed to
use or hold our common shares in connection with carrying on a business in
Canada; (d) persons whose our common shares constitute taxable Canadian
property under the Tax Act; or (e) persons that have a permanent establishment
in Canada for the purposes of the Canada-U.S. Tax Convention. U.S. Holders that
are subject to special provisions under the Code, including, but not limited to,
U.S. Holders described immediately above, should consult their own tax advisor
regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal
estate and gift, U.S. state and local, and foreign tax consequences relating to
the acquisition, ownership and disposition of our common shares.

If an entity or arrangement that is classified as a partnership
(or other pass-through entity) for U.S. federal income tax purposes holds our
common shares, the U.S. federal income tax consequences to such entity and the
partners (or other owners) of such entity generally will depend on the
activities of the entity and the status of such partners (or owners). This
summary does not address the tax consequences to any such owner. Partners (or
other owners) of entities or arrangements that are classified as partnerships or
as pass-through entities for U.S. federal income tax purposes should consult
their own tax advisors regarding the U.S. federal income tax consequences
arising from and relating to the acquisition, ownership, and disposition of our
common shares.

Ownership and Disposition of Common Shares

The following discussion is subject to the rules described
below under the heading Passive Foreign Investment Company Rules.

67

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Taxation of Distributions

A U.S. Holder that receives a distribution, including a
constructive distribution, with respect to a common share will be required to
include the amount of such distribution in gross income as a dividend (without
reduction for any foreign income tax withheld from such distribution) to the
extent of our current or accumulated earnings and profits, as computed for
U.S. federal income tax purposes. To the extent that a distribution exceeds our
current and accumulated earnings and profits, such distribution will be
treated first as a tax-free return of capital to the extent of a U.S. Holder's
tax basis in our common shares and thereafter as gain from the sale or exchange
of such common shares (see Sale or Other Taxable Disposition of Common Shares
below). However, we may not maintain the calculations of our earnings and
profits in accordance with U.S. federal income tax principles, and each U.S.
Holder may have to assume that any distribution by us with respect to our common
shares will constitute ordinary dividend income. Dividends received on our
common shares by corporate U.S. Holders generally will not be eligible for the
dividends received deduction. Subject to applicable limitations and provided
we are eligible for the benefits of the Canada-U.S. Tax Convention, dividends
paid by us to non-corporate U.S. Holders, including individuals, generally will
be eligible for the preferential tax rates applicable to long-term capital gains
for dividends, provided certain holding period and other conditions are
satisfied, including that we not be classified as a PFIC (as defined below) in
the tax year of distribution or in the preceding tax year. The dividend rules
are complex, and each U.S. Holder should consult its own tax advisor regarding
the application of such rules.

Sale or Other Taxable Disposition of Common Shares

A U.S. Holder will recognize gain or loss on the sale or other
taxable disposition of our common shares in an amount equal to the difference,
if any, between (a) the amount of cash plus the fair market value of any
property received and (b) such U.S. Holders tax basis in such common shares
sold or otherwise disposed of. Any such gain or loss generally will be capital
gain or loss, which will be long-term capital gain or loss if, at the time of
the sale or other disposition, such common shares are held for more than one
year.

Preferential tax rates apply to long-term capital gains of a
U.S. Holder that is an individual, estate, or trust. There are currently no
preferential tax rates for long-term capital gains of a U.S. Holder that is a
corporation. Deductions for capital losses are subject to significant
limitations under the Code.

Passive Foreign Investment Company Rules

If we were to constitute a PFIC for any year during a U.S.
Holders holding period, then certain potentially adverse rules would affect the
U.S. federal income tax consequences to a U.S. Holder resulting from the
acquisition, ownership and disposition of our common shares. We believe that we
were not a PFIC during the tax year ended December 31, 2014 and, based on
current business plans and financial expectations, we expect that we should not
be a PFIC for the current tax year. However, PFIC classification is
fundamentally factual in nature, generally cannot be determined until the close
of the tax year in question, and is determined annually. Additionally, the
analysis depends, in part, on the application of complex U.S. federal income tax
rules, which are subject to differing interpretations. Consequently, there can
be no assurance that we have never been and will not become a PFIC for any tax
year during which U.S. Holders hold our common shares.

In addition, in any year in which we are classified as a PFIC,
a U.S. Holder will be required to file an annual report with the IRS containing
such information as Treasury Regulations and/or other IRS guidance may require.
A failure to satisfy such reporting requirements may result in an extension of
the time period during which the IRS can assess a tax. U.S. Holders should
consult their own tax advisors regarding the requirements of filing such
information returns under these rules, including the requirement to file an IRS
Form 8621.

We generally will be a PFIC under Section 1297 of the Code if,
after the application of certain look-through rules with respect to
subsidiaries in which we hold at least 25% of the value of such subsidiary, for
a tax year, (a) 75% or more of our gross income for such tax year is passive
income (the income test) or (b) 50% or more of the value of our assets either
produce passive income or are held for the production of passive income (the
asset test), based on the quarterly average of the fair market value of such
assets. Gross income generally includes all sales revenues less the cost of
goods sold, plus income from investments and from incidental or outside
operations or sources, and passive income generally includes, for example, dividends,
interest, certain rents and royalties, certain gains from the sale of stock and
securities, and certain gains from commodities transactions. Active business
gains arising from the sale of commodities generally are excluded from passive
income if substantially all (85% or more) of a foreign corporations commodities
are stock in trade or inventory, depreciable property used in a trade or
business or supplies regularly used or consumed in the ordinary course of its
trade or business, and certain other requirements are satisfied.

68

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If we were a PFIC in any tax year during which a U.S. Holder
held our common shares, such holder generally would be subject to special rules
with respect to excess distributions made by us on our common shares and with
respect to gain from the disposition of our common shares. An excess
distribution generally is defined as the excess of distributions with respect
to the common shares received by a U.S Holder in any tax year over 125% of the
average annual distributions such U.S. Holder has received from us during the
shorter of the three preceding tax years, or such U.S. Holders holding period
for our common shares. Generally, a U.S. Holder would be required to allocate
any excess distribution or gain from the disposition of our common shares
ratably over its holding period for our common shares. Such amounts allocated to
the year of the disposition or excess distribution would be taxed as ordinary
income, and amounts allocated to prior tax years would be taxed as ordinary
income at the highest tax rate in effect for each such year and an interest
charge at a rate applicable to underpayments of tax would apply.

While there are U.S. federal income tax elections that
sometimes can be made to mitigate these adverse tax consequences (including the
QEF Election under Section 1295 of the Code and the Mark-to-Market Election
under Section 1296 of the Code), such elections are available in limited
circumstances and must be made in a timely manner.

U.S. Holders should be aware that, for each tax year, if any,
that we are a PFIC, we can provide no assurance that we will satisfy the record
keeping requirements of a PFIC, or that we will make available to U.S. Holders
the information such U.S. Holders require to make a QEF Election with respect to
us or any subsidiary that also is classified as a PFIC. U.S. Holders should
consult their own tax advisors regarding the potential application of the PFIC
rules to the ownership and disposition of our common shares, and the
availability of certain U.S. tax elections under the PFIC rules.

Additional Considerations

Additional Tax on Passive Income

Certain individuals, estates and trusts whose income exceeds
certain thresholds will be required to pay a 3.8% Medicare surtax on net
investment income including, among other things, dividends and net gain from
disposition of property (other than property held in certain trades or
businesses). U.S. Holders should consult their own tax advisors regarding the
effect, if any, of this tax on their ownership and disposition of our common
shares.

Receipt of Foreign Currency

The amount of any distribution paid to a U.S. Holder in foreign
currency, or on the sale, exchange or other taxable disposition of our common
shares, generally will be equal to the U.S. dollar value of such foreign
currency based on the exchange rate applicable on the date of receipt
(regardless of whether such foreign currency is converted into U.S. dollars at
that time). A U.S. Holder will have a basis in the foreign currency equal to its
U.S. dollar value on the date of receipt. Any U.S. Holder who converts or
otherwise disposes of the foreign currency after the date of receipt may have a
foreign currency exchange gain or loss that would be treated as ordinary income
or loss, and generally will be U.S. source income or loss for foreign tax credit
purposes. Different rules apply to U.S. Holders who use the accrual method. Each
U.S. Holder should consult its own U.S. tax advisor regarding the U.S. federal
income tax consequences of receiving, owning, and disposing of foreign
currency.

Foreign Tax Credit

Subject to the PFIC rules discussed above, a U.S. Holder that
pays (whether directly or through withholding) Canadian income tax with respect
to dividends paid on our common shares generally will be entitled, at the
election of such U.S. Holder, to receive either a deduction or a credit for such
Canadian income tax. Generally, a credit will reduce a U.S. Holders U.S.
federal income tax liability on a dollar-for-dollar basis, whereas a deduction
will reduce a U.S. Holders income subject to U.S. federal income tax. This
election is made on a year-by-year basis and applies to all foreign taxes paid
(whether directly or through withholding) by a U.S. Holder during a year.

69

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Complex limitations apply to the foreign tax credit, including
the general limitation that the credit cannot exceed the proportionate share of
a U.S. Holders U.S. federal income tax liability that such U.S. Holders
foreign source taxable income bears to such U.S. Holders worldwide taxable
income. In applying this limitation, a U.S. Holders various items of income and
deduction must be classified, under complex rules, as either foreign source or
U.S. source. Generally, dividends paid by a foreign corporation should be
treated as foreign source for this purpose, and gains recognized on the sale of
stock of a foreign corporation by a U.S. Holder should be treated as U.S. source
for this purpose, except as otherwise provided in an applicable income tax
treaty, and if an election is properly made under the Code. However, the amount
of a distribution with respect to our common shares that is treated as a
dividend may be lower for U.S. federal income tax purposes than it is for
Canadian federal income tax purposes, resulting in a reduced foreign tax credit
allowance to a U.S. Holder. In addition, this limitation is calculated
separately with respect to specific categories of income. The foreign tax credit
rules are complex, and each U.S. Holder should consult its own U.S. tax advisor
regarding the foreign tax credit rules.

Backup Withholding and Information Reporting

Under U.S. federal income tax law, certain categories of U.S.
Holders must file information returns with respect to their investment in, or
involvement in, a foreign corporation. For example, U.S. return disclosure
obligations (and related penalties) are imposed on individuals who are U.S.
Holders that hold certain specified foreign financial assets in excess of
certain threshold amounts. The definition of specified foreign financial assets
includes not only financial accounts maintained in foreign financial
institutions, but also, unless held in accounts maintained by a financial
institution, any stock or security issued by a non-U.S. person, any financial
instrument or contract held for investment that has an issuer or counterparty
other than a U.S. person and any interest in a foreign entity. U. S. Holders may
be subject to these reporting requirements unless they hold our common shares in
an account at certain financial institutions. Penalties for failure to file
certain of these information returns are substantial. U.S. Holders should
consult their own tax advisors regarding the requirements of filing information
returns, including the requirement to file an IRS Form 8938.

Payments made within the U.S. or by a U.S. payor or U.S.
middleman, of dividends on, and proceeds arising from the sale or other taxable
disposition of, our common shares will generally be subject to information
reporting and backup withholding tax, at the rate of 28%, if a U.S. Holder (a)
fails to furnish such U.S. Holders correct U.S. taxpayer identification number
(generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification
number, (c) is notified by the IRS that such U.S. Holder has previously failed
to properly report items subject to backup withholding tax, or (d) fails to
certify, under penalty of perjury, that such U.S. Holder has furnished its
correct U.S. taxpayer identification number and that the IRS has not notified
such U.S. Holder that it is subject to backup withholding tax. However, certain
exempt persons generally are excluded from these information reporting and
backup withholding rules. Backup withholding is not an additional tax. Any
amounts withheld under the U.S. backup withholding tax rules will be allowed as
a credit against a U.S. Holders U.S. federal income tax liability, if any, or
will be refunded, if such U.S. Holder furnishes required information to the IRS
in a timely manner.

The discussion of reporting requirements set forth above is not
intended to constitute a complete description of all reporting requirements that
may apply to a U.S. Holder. A failure to satisfy certain reporting requirements
may result in an extension of the time period during which the IRS can assess a
tax, and under certain circumstances, such an extension may apply to assessments
of amounts unrelated to any unsatisfied reporting requirement. Each U.S. Holder
should consult its own tax advisor regarding the information reporting and
backup withholding rules.

F.          
Dividends and Paying Agents

Not applicable.

G.          
Statement by Experts

Not applicable.

H.          
Documents on Display

70

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We are subject to the informational requirements of the U.S.
Securities Exchange Act of 1934, as amended (the Exchange Act). As a foreign
private issuer, we are exempt from the rules and regulations under the Exchange
Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act, with respect to their purchase and sale of our shares. In addition, we are
not required to file reports and financial statements with the SEC as frequently
or as promptly as U.S. companies whose securities are registered under the
Exchange Act. However, we are required to file with the SEC, within four months
after the end of each fiscal year, an annual report on Form 20-F containing
financial statements audited by an independent accounting firm. We publish
unaudited interim financial information after the end of each quarter. We
furnish this quarterly financial information to the SEC under cover of a Form
6-K.

You may read and copy any of our reports and other information
at, and obtain copies upon payment of prescribed fees from, the Public Reference
Room maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. In
addition, the SEC maintains a website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC at http://www.sec.gov. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.

The documents concerning us referred to in this Form 20-F may
be viewed at our executive offices during normal business hours.

We are required to file reports and other information with the
securities commissions in Canada. You are invited to read and copy any reports,
statements or other information, other than confidential filings, that we file
with the provincial securities commissions. These filings are also
electronically available from SEDAR at www.sedar.com, the Canadian equivalent of
the SECs electronic document gathering and retrieval system.

I.          
Subsidiary Information

Not applicable.

ITEM
11.                    
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See the discussion under the heading Item 5. Operating and
Financial Review and Prospects  Financial Instruments and Risk Management as
well as Notes 5 and 6 to our audited financial statements for the years ended
December 31, 2014 and December 31, 2013, and ten months ended December 31, 2012
filed as part of this Form 20-F.

ITEM
12.                    
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM
13.                    
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM
14.                    
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

The Shareholders Rights Plan Agreement between us and
Computershare Investor Services Inc., as amended, was originally executed on
March 9, 2010. The Shareholder Rights Plan was thereafter approved by our
shareholders at our Annual General Meeting held on August 17, 2010, extended for
two years at our Annual General and Special Meeting held on August 17, 2012 and
extended for two years at our Annual General and Special Meeting held on June 6,
2014. The Shareholder Rights Plan is designed to encourage the fair treatment of
shareholders in connection with any take-over bid for us. The Shareholder Rights
Plan provides our Board of Directors and the shareholders with more time to
fully consider any unsolicited take-over bid for us; it will allow our Board of
Directors to pursue, if appropriate, other alternatives to maximize shareholder
value and it will allow additional time for competing bids to emerge. Existing securities legislation in Canada requires a
take-over bid to remain open for only thirty-five (35) days. Our Board of
Directors does not believe that this period is sufficient to permit them to
determine whether there may be alternatives available to maximize shareholder
value or whether other bidders may be prepared to pay more for our shares than
the Offeror (as defined in the Shareholder Rights Plan). In addition, our Board
of Directors is concerned that, while securities legislation has addressed many
concerns of unequal treatment of shareholders, there remains the possibility
that control or effective control may be acquired pursuant to a private
agreement in which a small number of shareholders dispose of shares at a premium
to market price which is not shared with the other shareholders. Also, a person
may slowly accumulate shares through stock exchange acquisitions which may
result, over time, in an acquisition of control without payment of fair value
for control or fair sharing of any control premium among all shareholders. The
Shareholder Rights Plan addresses these concerns by applying to all acquisitions
of 20% or more of our common shares. See the discussion under the heading Item
6.B.  Shareholder Rights Plan.

71

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On March 12, 2014, our Board of Directors approved and adopted
the Advance Notice Policy, which was approved by the shareholders on June 6,
2014. The purpose of the Advance Notice Policy is to provide shareholders, the
Board of Directors and management with a clear framework for nominating
directors. The Advance Notice Policy fixes a deadline by which holders of record
of our common shares must submit director nominations to us prior to any annual
general or special meeting of shareholders and sets forth the information that a
shareholder must include in the notice to us for the notice to be in proper
written form in order for any director nominee to be eligible for election at
any annual or special meeting of shareholders. A complete copy of the Advance
Notice Policy is included as an exhibit to this Form 20-F.

ITEM
15.                    
CONTROLS AND PROCEDURES

A.Disclosure Controls and Procedures

As of the end of the fiscal year ended December 31, 2014, an
evaluation of the effectiveness of our companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act, was performed by our companys management, under the supervision
and with the participation of our companys Chief Executive Officer and Chief
Financial Officer. Based on that evaluation, our companys Chief Executive
Officer and Chief Financial Officer have concluded that as a result of the
material weaknesses in our internal control over financial reporting disclosed
below, our companys disclosure controls and procedures were not effective to
give reasonable assurance that the information required to be disclosed by our
company in reports that it files or submits under the Exchange Act is (i)
recorded, processed, summarized and reported, within the time periods specified
in the SECs rules and forms, and (ii) accumulated and communicated to
management, including its principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.

B.Managements Report on Internal Control over Financial
Reporting

Our companys management, including our Chief Executive Officer
and Chief Financial Officer, is responsible for establishing and maintaining
adequate internal control over financial reporting as such term is defined in
Rule 13a-15(f) under the Exchange Act. Our internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability
of our financial reporting and the preparation of financial statements for
external purposes in accordance with IFRS. Internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect
the transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, which in the case of our company is IFRS, and that receipts and
expenditures are being made only in accordance with authorizations of management
and directors; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our assets
that could have a material effect on the financial statements.

It should be noted that because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

72

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Our companys management (with the participation of our Chief
Executive Officer and Chief Financial Officer) conducted an evaluation of our
companys internal control over financial reporting as of December 31, 2014.
This evaluation was based on the framework in Internal Control  Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on its assessment, management has concluded that, as
of December 31, 2014, our internal control over financial reporting was not
effective because management identified material weaknesses in our internal
control over financial reporting. In particular, material weaknesses were
identified with respect to (i) our process for evaluating and reviewing
impairment indicators over petroleum and natural gas properties and (ii) our
process for determining our decommissioning obligations.

We are in the process of enhancing our internal controls in
order to remediate these material weaknesses.

C.Attestation Report of the Registered Public Accounting Firm

Because we are a non-accelerated filer, this Form 20-F is not
required to include an attestation report of our independent auditors regarding
internal control over financial reporting.

D.Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial
reporting during the year ended December 31, 2014. However, we are in the
process of making changes to our internal control over financial reporting in
order to remediate the material weaknesses identified above and strengthen our
system of internal control over financial reporting.

ITEM
16A.                  AUDIT
COMMITTEE FINANCIAL EXPERT

We do not have a financial expert, as defined by the SEC,
serving on our Audit Committee. In 2011, we adopted IFRS to comply with Canadian
public company reporting standards. The Audit Committee members do not, as yet,
have sufficient experience and in-depth understanding of IFRS to qualify as
audit committee financial experts.

ITEM
16B.                  CODE
OF ETHICS

Our Board of Directors has adopted a Code of Business Conduct
and Ethics that meets the definition of a code of ethics in Form 20-F (the
Code) and which applies toall of our officers, directors and employees and
contractors. The Code reflects our commitment to a culture of honesty,
transparency and accountability, and outlines the basic principles and policies
with which the directors, officers, employees and contractors are expected to
comply.

A copy of the Code may be viewed on our website at
www.hemisphereenergy.ca. Alternatively, a printed copy may be requested by mail
to Suite 2000, 1055 West Hastings Street, Vancouver, British Columbia V6E 2E9,
Attention: Annalisa Whittle by email to info@hemisphereenergy.ca or by telephone
to (604) 685-9255.

We intend to disclose and summarize any amendment to, or waiver
from, any provision of the Code that is required to be so disclosed and
summarized, on our website at www.hemisphereenergy.ca.

ITEM
16C.                  PRINCIPAL
ACCOUNTANT FEES AND SERVICES

Our external auditor is Smythe Ratcliffe LLP located at Suite
700, 355 Burrard Street, Vancouver, British Columbia V6C 2G8.

The fees billed to us by Smythe Ratcliffe, LLP, our external
auditor, in each of the last two fiscal years are as follows:

Fiscal Year Ending
    Audit Fees(1)
    Audit-RelatedFees(2)
    Tax Fees(3)
    All Other Fees(4)December 31, 2014
    $50,500
    $26,920
    Nil
    NilDecember 31, 2013
    $44,370
    $27,540
    $6,120
    Nil


Notes:

| | (1) | Audit Fees include fees to audit our annual financial
      statements and review of our quarterly financial statements, or services
      that are normally provided in connection with statutory and regulatory
      filings or engagements. Audit Fees include fees for review of tax
      provisions and for accounting consultations on matters reflected in the
      financial statements. Audit Fees also include audit or other attest
      services required by legislation or regulation such as comfort letters,
      consents and reviews of securities filings.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Audit-Related Fees include fees for assurance and
      related services that are reasonably related to the performance of the
      audit or review of our financial statements and are not reported under
      Audit Fees. These audit related services include due diligence
      assistance, accounting consultations on proposed transactions, internal
      control reviews and consultations on conversion to IFRS.                                                                                                                                                      
| | (3) | Tax Fees include fees for tax compliance, tax planning
      and tax advice. Tax planning and tax advice include assistance with, tax
      advice related to mergers and acquisitions application of tax
  pools.                                                                                                                                                                                                                                                                                                                                                                   
| | (4) | All Other Fees include all other non-audit
    services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

73

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Pre-Approval Policies and Procedures

The Audit Committee, in accordance with procedures for our
company, approved all of the services described above.

In relation to the pre-approval of all audit and audit-related
services and fees the charter of the Audit Committee provides that our companys
external auditors are prohibited from providing any non-audit services to our
company without the written consent of the Audit Committee unless such non-audit
services are De Minimus Non-Audit Services as outlined in section 2.4 of
NI 52-110. In determining whether the external auditors will be granted
permission to provide non-audit services, the Audit Committee is to consider
that the benefits to our company from the provision of such services outweighs
the risk of any compromise to, or loss of, the independence of the external
auditors in carrying out their auditing mandate.

We did not rely on the de minimus exemption provided by
Section (c)(7)(i)(C) of Rule 2-01 of SEC Regulation S-X or of section 2.4 of NI
52-1101 in 2014.

ITEM
16D.                  EXEMPTIONS
FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM
16E.                  PURCHASES
OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

We did not purchase any common shares in the fiscal year ended
December 31, 2014.

ITEM
16F.                  CHANGE
IN REGISTRANTS CERTIFYING ACCOUNTANT

None.

ITEM
16G.                  CORPORATE
GOVERNANCE

Not applicable.

ITEM
16H.                 
MINE SAFETY DISCLOSURE

Not applicable.

PART III

ITEM
17.                    
FINANCIAL STATEMENTS

See Item 18. Financial Statements.

74

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ITEM
18.                    
FINANCIAL STATEMENTS

See the Index to Financial Statements in this Form 20-F for a
list of the financial statements filed as part of this Form 20-F.

ITEM
19.                    
EXHIBITS

|Exhibit |  |                                                                                                                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description                                                                                                                                                                                                                                                                                                                     
|1.1     |  | Articles (incorporated herein by reference to Exhibit 1.1
      to our Registration Statement on Form 20-F filed with the SEC on July 22,
      2014)                                                                                                                                                                           
|1.2     |  | Notice of Articles (incorporated herein by reference to
      Exhibit 1.2 to our Registration Statement on Form 20-F filed with the SEC
      on July 22, 2014)                                                                                                                                                                 
|1.3     |  | Certificate of change of name to Hemisphere Energy
      Corporation dated April 24, 2009 (incorporated herein by reference to
      Exhibit 1.3 to our Registration Statement on Form 20-F filed with the SEC
      on July 22, 2014)                                                                                          
|1.4     |  | Certificate of change of name to Northern Hemisphere
      Development Corp. dated January 14, 2000 (incorporated herein by reference
      to Exhibit 1.4 to our Registration Statement on Form 20-F filed with the
      SEC on July 22, 2014)                                                                                
|1.5     |  | Certificate of change of name to Hemisphere Development
      Corp. dated May 18, 1978 (incorporated herein by reference to Exhibit 1.5
      to our Registration Statement on Form 20-F filed with the SEC on July 22,
      2014)                                                                                             
|2.1     |  | Shareholders Rights Plan Agreement between Hemisphere and
      Computershare Investor Services Inc. dated March 9, 2010, as amended
      (incorporated herein by reference to Exhibit 2.1 to our Registration
      Statement on Form 20-F filed with the SEC on July 22, 2014)                                               
|2.2     |  | Advance Notice Policy of Hemisphere Energy Corporation
      (incorporated herein by reference to Exhibit 14.1 to our Registration
      Statement on Form 20-F filed with the SEC on July 22, 2014)                                                                                                                            
|4.1     |  | Commitment letter between Hemisphere Energy Corporation
      and Alberta Treasury Branches dated September 19, 2013 (incorporated
      herein by reference to Exhibit 10.6 to our Registration Statement on Form
      20-F filed with the SEC on July 22, 2014)                                                              
|4.2     |  | First Amending Agreement to the Commitment Letter dated
      September 19, 2013 between Hemisphere Energy Corporation and Alberta
      Treasury Branches effective June 23, 2014 (incorporated herein by
      reference to Exhibit 10.7 to our Registration Statement on Form 20-F filed
      with the SEC on July 22, 2014)
|4.3     |  | Second Amending Agreement to the Commitment Letter dated
      September 19, 2013 between Hemisphere Energy Corporation and Alberta
  Treasury Branches effective November 18, 2014                                                                                                                                             
|4.4#    |  | Executive Employment Agreement between Hemisphere Energy
    Corporation and Don Simmons dated September 1, 2014                                                                                                                                                                                                                
|4.5#    |  | Executive Employment Agreement between Hemisphere Energy
      Corporation and Ian Duncan dated September 1, 2014                                                                                                                                                                                                               
|4.6#    |  | Executive Employment Agreement between Hemisphere Energy
      Corporation and Dorlyn Evancic dated September 1, 2014                                                                                                                                                                                                           
|4.7#    |  | Executive Employment Agreement between Hemisphere Energy
      Corporation and Andrew Arthur dated September 1, 2014                                                                                                                                                                                                            
|4.8#    |  | Executive Employment Agreement between Hemisphere Energy
      Corporation and Ashley Ramsden- Wood dated September 1, 2014                                                                                                                                                                                                     
|10.1    |  | Stock Option Plan (incorporated herein by reference to
      Exhibit 10.1 to our Registration Statement on Form 20-F filed with the SEC
      on July 22, 2014)                                                                                                                                                                 
|12.1    |  | Certification of the chief executive officer pursuant to
      Rule 13a-14(a)                                                                                                                                                                                                                                                   
|12.2    |  | Certification of the chief financial officer pursuant to Rule
      13a-14(a)                                                                                                                                                                                                                                                   
|13.1    |  | Certification of the chief executive officer pursuant to
      18 U.S.C. Section 1350                                                                                                                                                                                                                                           
|13.2    |  | Certification of the chief financial officer pursuant to
      18 U.S.C. Section 1350                                                                                                                                                                                                                                           
|15.1    |  | Consent of Smythe Ratcliffe LLP                                                                                                                                                                                                                                                                                                 
|15.2    |  | Consent of McDaniel Associates & Consultants Ltd.                                                                                                                                                                                                                                                                               

75

---

|15.3 |  | Consent of Sproule Associates Limited                                                                                                                                                                                                                                                                                                                                                                                 
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|99.1 |  | McDaniel & Associates Consultants Ltd. - Report of
      Third Party for the Evaluation of Oil and Gas Reserves attributed to
      selected Hemisphere Energy Corporation's interests in Western Canada
      (effective date of December 31, 2014)                                                                                                                                                                  
|99.2 |  | McDaniel & Associates Consultants Ltd. - Report of
      Third Party for the Evaluation of Oil and Gas Reserves attributed to selected Hemisphere Energy
      Corporation's interests in Western Canada (effective date of December 31,
      2013) (incorporated herein by reference to Exhibit 14.1 to our
      Registration Statement on Form 20-F (Amendment No. 1) filed with the SEC
      on October 6, 2014)
|99.3 |  | Sproule Associates Limited  Evaluation of the P&NG
      Reserves of Hemisphere Energy Corporation (as of December 31, 2012)
      Constant Dollars (incorporated herein by reference to Exhibit 4.2 to our
      Registration Statement on Form 20-F (Amendment No. 1) filed with the SEC
      on October 6, 2014)                                                                                                 

# Denotes management compensation plan or contract.

76

---

INDEX TO THE FINANCIAL STATEMENTS

For the year ended December 31, 2014, year ended December 31,
2013 and ten months ended December 31, 2012

|Managements
      Report                                                                | 78 
|---------------------------------------------------------------------------------------- | ---
|Independent
      Auditors Report                                                       | 79 
|Statements
      of Financial Position                                                   | 81 
|Statements of Loss and Comprehensive Loss                                                | 82 
|Statements
      of Cash Flows                                                           | 83 
|Statements
      of Changes in Shareholders Equity                                      | 84 
|Notes
      to the Financial Statements                                                  | 85 
|Supplementary
      Oil and Gas Reserve Estimation and Disclosures  ASC 932 (unaudited) | 114

77

---

MANAGEMENTS REPORT

To the Shareholders of Hemisphere Energy Corporation:

Management is responsible for the preparation of the financial
statements and the consistent presentation of all other financial information
that is publicly disclosed. The financial statements have been prepared in
accordance with the accounting policies detailed in the notes to the financial
statements and in accordance with IFRS and include estimates and assumptions
based on managements best judgment. Management maintains a system of internal
controls to provide reasonable assurance that assets are safeguarded and that
relevant and reliable financial information is produced in a timely manner.
Independent auditors appointed by the shareholders have examined the financial
statements. Their report is presented with the financial statements. The Audit
Committee, consisting of independent members of the Board of Directors, has
reviewed financial statements with management and the independent auditors. The
Board of Directors has approved the financial statements on the recommendation
of the Audit Committee.



|Vancouver, British Columbia  |  |                                        
|---------------------------- |  | ---------------------------------------
|April 21, 2015               |  |                                        
|                             |  |                                        
|(signed) Don
      Simmons |  | (signed) Dorlyn Evancic              
|Don Simmons, President & CEO |  | Dorlyn Evancic, Chief Financial Officer

78

---

INDEPENDENT AUDITORS REPORT

We have audited the accompanying financial statements of
Hemisphere Energy Corporation, which comprise the statements of financial
position as at December 31, 2014, December 31, 2013 and January 1, 2013, and the
statements of loss and comprehensive loss, changes in shareholders' equity and
cash flows for the years ended December 31, 2014 and 2013, and the ten months
ended December 31, 2012, and a summary of significant accounting policies and
other explanatory information.

Management's Responsibility for the Financial Statements

Management is responsible for the preparation and fair
presentation of these financial statements in accordance with International
Financial Reporting Standards as issued by the International Accounting
Standards Board, and for such internal control as management determines is
necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.

Auditors Responsibility

Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits in accordance with
Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement.

An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due
to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity's preparation and fair presentation of
the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating
the overall presentation of the financial statements.

We believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a basis for our audit
opinion.

Opinion

In our opinion, the financial statements present fairly, in all
material respects, the financial position of Hemisphere Energy Corporation as at
December 31, 2014, December 31, 2013 and January 1, 2013, and its financial
performance and its cash flows for the years ended December 31, 2014 and 2013,
and the ten months ended December 31, 2012 in accordance with International
Financial Reporting Standards as issued by the International Accounting
Standards Board.

Comparative Information

Without modifying our opinion, we draw attention to Note 4 to
the financial statements as at December 31, 2013 and January 1, 2013, and for
the year ended December 31, 2013 and for the ten months ended December 31, 2012,
which indicates that the comparative information presented has been restated.

79

---

Chartered Accountants

Vancouver, Canada

April 21, 2015

80

---

STATEMENTS OF FINANCIAL
POSITION(Expressed in Canadian
dollars)

|                                           | Notes      |   | December 31, 2014 |   |   | December 31, 2013 |   |   | January 1, 2013  |  
|------------------------------------------ | ---------- | - | ----------------- | - | - | ----------------- | - | - | ---------------- | -
|                                           |            |   |                   |   |   | (Restated Note 4  | ) |   | (Restated Note 4 | )
|Assets                                     |            |   |                   |   |   |                   |   |   |                  |  
|Current assets                             |            |   |                   |   |   |                   |   |   |                  |  
|Accounts receivable                        | 6 (a)      | $ | 1,304,252         |   | $ | 1,042,407         |   | $ | 904,454          |  
|Prepaid expenses                           |            |   | 132,929           |   |   | 103,172           |   |   | 115,769          |  
|                                           |            |   | 1,437,181         |   |   | 1,145,579         |   |   | 1,020,223        |  
|Non-current assets                         |            |   |                   |   |   |                   |   |   |                  |  
|Reclamation deposits                       | 10         |   | 105,535           |   |   | 105,535           |   |   | 100,535          |  
|Exploration and evaluation
      assets    | 8, 12      |   | 2,896,887         |   |   | 2,000,613         |   |   | 1,766,856        |  
|Property and equipment                     | 9, 12      |   | 42,870,113        |   |   | 27,411,445        |   |   | 20,424,419       |  
|Deferred tax assets                        | 18         |   | 1,641,916         |   |   | 1,532,405         |   |   | 1,174,832        |  
|Total
      assets                         |            | $ | 48,951,632        |   | $ | 32,195,577        |   | $ | 24,486,865       |  
|Liabilities                                |            |   |                   |   |   |                   |   |   |                  |  
|Current liabilities                        |            |   |                   |   |   |                   |   |   |                  |  
|Bank indebtedness                          | 12         | $ | 7,184,147         |   | $ | 4,500,000         |   | $ | 1,035,000        |  
|Accounts payable and accrued liabilities   |            |   | 5,897,643         |   |   | 2,976,485         |   |   | 3,912,818        |  
|Flow-through premium liability             | 13         |   | -                 |   |   | 369,240           |   |   | -                |  
|                                           |            | $ | 13,081,790        |   | $ | 7,845,725         |   | $ | 4,947,818        |  
|Non-current liabilities                    |            |   |                   |   |   |                   |   |   |                  |  
|Decommissioning obligations                | 10         |   | 5,177,607         |   |   | 2,011,282         |   |   | 467,235          |  
|                                           |            |   | 18,259,397        |   |   | 9,857,007         |   |   | 5,415,053        |  
|Shareholders
      Equity                 |            |   |                   |   |   |                   |   |   |                  |  
|Capital stock                              | 13         |   | 51,881,960        |   |   | 42,127,674        |   |   | 38,805,193       |  
|Share-based payment reserve                | 13 (b)     |   | 2,513,122         |   |   | 2,574,789         |   |   | 2,214,325        |  
|Warrant reserve                            | 13 (c)     |   | -                 |   |   | 204,479           |   |   | 183,572          |  
|Deficit                                    |            |   | (23,702,847       | ) |   | (22,568,372       | ) |   | (22,131,278      | )
|Total
      shareholders equity           |            |   | 30,692,235        |   |   | 22,338,570        |   |   | 19,071,812       |  
|Total liabilities and shareholders equity |            | $ | 48,951,632        |   | $ | 32,195,577        |   | $ | 24,486,865       |  
|                                           |            |   |                   |   |   |                   |   |   |                  |  
|Commitment                                 | (Note 14 ) |   |                   |   |   |                   |   |   |                  |  

The accompanying notes are an integral part of these
financial statements.

On Behalf of the Board of Directors



|(signed) Bruce
      McIntyre |  | (signed) Don Simmons
|------------------------------- |  | ----------------------
|Bruce McIntyre, Director        |  | Don Simmons, Director 

81

---

STATEMENTS OF LOSS AND COMPREHENSIVE
LOSS(Expressed in Canadian dollars)

|                                               |        |   | Year Ended        |   |   | Year Ended        |   |   | 10 Months Ended   |  
|---------------------------------------------- | ------ | - | ----------------- | - | - | ----------------- | - | - | ----------------- | -
|                                               | Note   |   | December 31, 2014 |   |   | December 31, 2013 |   |   | December 31, 2012 |  
|                                               |        |   |                   |   |   | (Restated Note 4  | ) |   | (Restated Note 4  | )
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Oil and natural gas revenue                    |        | $ | 16,635,279        |   | $ | 10,573,199        |   | $ | 7,875,723         |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Royalties                                      |        |   | (3,008,377        | ) |   | (1,898,532        | ) |   | (1,371,883        | )
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Net oil and natural gas revenue                |        |   | 13,626,902        |   |   | 8,674,667         |   |   | 6,503,840         |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Expenses                                       |        |   |                   |   |   |                   |   |   |                   |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Production and operating                       |        |   | 4,351,248         |   |   | 3,067,174         |   |   | 1,846,532         |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Exploration and evaluation                     | 8      |   | 190,887           |   |   | 116,006           |   |   | 120,882           |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Depletion and depreciation                     | 9      |   | 5,360,989         |   |   | 3,733,693         |   |   | 2,943,262         |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|General and administrative                     | 13 (b) |   | 2,654,943         |   |   | 1,877,376         |   |   | 1,527,505         |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Impairment of property and equipment           | 9      |   | 2,702,925         |   |   | 556,371           |   |   | 184,938           |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|                                               |        |   | 15,260,992        |   |   | 9,350,620         |   |   | 6,623,119         |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Results from operating activities              |        |   | (1,634,090        | ) |   | (675,953          | ) |   | (119,279          | )
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Finance expense                                | 11     |   | (276,347          | ) |   | (195,775          | ) |   | (40,459           | )
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Gain on disposition                            |        |   | 2,942             |   |   | 3,889             |   |   | -                 |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Flow-through share                             |        |   |                   |   |   |                   |   |   |                   |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|premium recovery                               | 13 (a) |   | 369,240           |   |   | -                 |   |   | -                 |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Loss before income taxes                       |        |   | (1,538,255        | ) |   | (867,839          | ) |   | (159,738          | )
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Deferred tax (expense) recovery                | 18     |   | (129,552          | ) |   | 357,573           |   |   | (312,307          | )
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Net loss and comprehensive loss for the period |        | $ | (1,667,807        | ) | $ | (510,266          | ) | $ | (472,045          | )
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Loss per share                                 |        |   |                   |   |   |                   |   |   |                   |  
|                                               |        |   |                   |   |   |                   |   |   |                   |  
|Basic and diluted                              | 13 (d) | $ | (0.02             | ) | $ | (0.01             | ) | $ | (0.01             | )

The accompanying notes are an integral part of these
financial statements.

82

---

STATEMENTS OF CASH FLOWS(Expressed in Canadian dollars)

|                                                          |   | Year Ended        |   |   | Year Ended        |   |   | 10 Months Ended   |  
|--------------------------------------------------------- | - | ----------------- | - | - | ----------------- | - | - | ----------------- | -
|                                                          |   | December 31, 2014 |   |   | December 31, 2013 |   |   | December 31, 2012 |  
|                                                          |   |                   |   |   |                   |   |   |                   |  
|                                                          |   |                   |   |   | (Restated Note 4  | ) |   | (Restated Note 4  | )
|                                                          |   |                   |   |   |                   |   |   |                   |  
|Operating activities                                      |   |                   |   |   |                   |   |   |                   |  
|Loss for the period                                       | $ | (1,667,807        | ) | $ | (510,266          | ) | $ | (472,045          | )
|Items not affecting cash                                  |   |                   |   |   |                   |   |   |                   |  
|Depletion, depreciation
      and accretion               |   | 5,427,765         |   |   | 3,740,206         |   |   | 2,957,585         |  
|Impairment of property and equipment                      |   | 2,702,925         |   |   | 556,371           |   |   | 184,938           |  
|Flow through share
      premium recovery                 |   | (369,240          | ) |   | -                 |   |   | -                 |  
|Gain on disposition                                       |   | (2,942            | ) |   | -                 |   |   | -                 |  
|Deferred tax expense
      (recovery)                     |   | 129,552           |   |   | (357,573          | ) |   | 312,307           |  
|Share-based payments                                      |   | 452,780           |   |   | 360,464           |   |   | 282,872           |  
|Funds flow from operations                                |   | 6,673,033         |   |   | 3,789,202         |   |   | 3,265,657         |  
|Changes in non-cash working capital (Note 16)             |   | (13,353           | ) |   | (123,928          | ) |   | 406,975           |  
|Cash provided by operating activities                     |   | 6,659,680         |   |   | 3,665,274         |   |   | 3,672,632         |  
|Investing activities                                      |   |                   |   |   |                   |   |   |                   |  
|Property and equipment
      expenditures                 |   | (19,476,818       | ) |   | (8,915,499        | ) |   | (8,193,606        | )
|Exploration and evaluation expenditures                   |   | (1,889,546        | ) |   | (1,057,814        | ) |   | (3,573,912        | )
|Reclamation deposits                                      |   | -                 |   |   | (5,000            | ) |   | 51,442            |  
|Proceeds from disposition of property and
      equipment |   | 50,000            |   |   | -                 |   |   | -                 |  
|Changes in non-cash working                               |   |                   |   |   |                   |   |   |                   |  
|Capital (Note 16)                                         |   | 2,642,909         |   |   | (947,511          | ) |   | 2,665,666         |  
|Cash used in investing activities                         |   | (18,673,455       | ) |   | (10,925,824       | ) |   | (9,050,410        | )
|Financing activities                                      |   |                   |   |   |                   |   |   |                   |  
|Shares issued for cash,
      net of issue costs          |   | 9,329,628         |   |   | 3,785,800         |   |   | 2,158,880         |  
|                                                          |   |                   |   |   |                   |   |   |                   |  
|Change in non-cash working                                |   |                   |   |   |                   |   |   |                   |  
|                                                          |   |                   |   |   |                   |   |   |                   |  
|Capital (Note 16)                                         |   | -                 |   |   | 9,750             |   |   | -                 |  
|                                                          |   |                   |   |   |                   |   |   |                   |  
|Cash provided by financing activities                     |   | 9,329,628         |   |   | 3,795,550         |   |   | 2,158,880         |  
|                                                          |   |                   |   |   |                   |   |   |                   |  
|Outflow of cash                                           |   | (2,684,147        | ) |   | (3,465,000        | ) |   | (3,218,898        | )
|                                                          |   |                   |   |   |                   |   |   |                   |  
|Cash (bank indebtedness), beginning of period             |   | (4,500,000        | ) |   | (1,035,000        | ) |   | 2,183,898         |  
|                                                          |   |                   |   |   |                   |   |   |                   |  
|Bank indebtedness, end of period                          | $ | (7,184,147        | ) | $ | (4,500,000        | ) | $ | (1,035,000        | )

The accompanying notes are an integral part of these
financial statements.

Supplemental cash flow information (Note 16)

83

---

STATEMENTS OF CHANGES IN SHAREHOLDERS
EQUITY(Expressed in Canadian dollars)

|                                            |        |  |            |  |   |               |   |   |             |   |   |          |   |   | Deficit     |   |   |                    |  
|------------------------------------------- | ------ |  | ---------- |  | - | ------------- | - | - | ----------- | - | - | -------- | - | - | ----------- | - | - | ------------------ | -
|                                            |        |  | Number of  |  |   |               |   |   | Share-based |   |   |          |   |   |             |   |   |                    |  
|                                            |        |  | common     |  |   |               |   |   | payment     |   |   | Warrant  |   |   | (Restated   |   |   |                    |  
|                                            | Note   |  | shares     |  |   | Capital stock |   |   | reserve     |   |   | reserve  |   |   | Note
    4) |   |   | Total
      Equity |  
|Balance, February 29, 2012                  |        |  | 50,374,701 |  | $ | 36,719,485    |   | $ | 1,931,453   |   | $ | 110,400  |   | $ | (21,659,233 | ) | $ | 17,102,105         |  
|Warrant exercises                           | 13 (a) |  | 1,752,047  |  |   | 1,051,228     |   |   | -           |   |   | -        |   |   | -           |   |   | 1,051,228          |  
|Stock option exercise                       | 13 (a) |  | 5,000      |  |   | 1,250         |   |   | -           |   |   | -        |   |   | -           |   |   | 1,250              |  
|Share-based payments                        | 13 (b) |  | -          |  |   | -             |   |   | 282,872     |   |   | -        |   |   | -           |   |   | 282,872            |  
|Share issuance                              | 13 (a) |  | 1,829,300  |  |   | 1,115,873     |   |   | -           |   |   | 73,172   |   |   | -           |   |   | 1,189,045          |  
|Share issuance costs                        | 13 (a) |  | -          |  |   | (82,643       | ) |   | -           |   |   | -        |   |   | -           |   |   | (82,643            | )
|Net loss for the period                     |        |  | -          |  |   | -             |   |   | -           |   |   | -        |   |   | (472,045    | ) |   | (472,045           | )
|Balance, December 31, 2012                  |        |  | 53,961,048 |  |   | 38,805,193    |   |   | 2,214,325   |   |   | 183,572  |   |   | (22,131,278 | ) |   | 19,071,812         |  
|Non-flow-through share issuance             | 13 (a) |  | 4,269,450  |  |   | 2,262,808     |   |   | -           |   |   | 94,079   |   |   | -           |   |   | 2,356,887          |  
|Flow-through share issuance                 | 13 (a) |  | 3,077,000  |  |   | 2,000,050     |   |   | -           |   |   | -        |   |   | -           |   |   | 2,000,050          |  
|Share-based payments                        | 13 (b) |  | -          |  |   | -             |   |   | 360,464     |   |   | -        |   |   | -           |   |   | 360,464            |  
|Share issuance costs                        | 13 (a) |  | -          |  |   | (571,137      | ) |   | -           |   |   | -        |   |   | -           |   |   | (571,137           | )
|Premium on issuance of flow- through shares | 13 (a) |  | -          |  |   | (369,240      | ) |   | -           |   |   | -        |   |   | -           |   |   | (369,240           | )
|Expiry of warrants                          | 13 (c) |  | -          |  |   | -             |   |   | -           |   |   | (73,172  | ) |   | 73,172      |   |   | -                  |  
|Net loss for the year                       |        |  | -          |  |   | -             |   |   | -           |   |   | -        |   |   | (510,266    | ) |   | (510,266           | )
|Balance, December 31, 2013                  |        |  | 61,307,498 |  |   | 42,127,674    |   |   | 2,574,789   |   |   | 204,479  |   |   | (22,568,372 | ) |   | 22,338,570         |  
|Non-flow-through share issuance             | 13 (a) |  | 13,333,500 |  |   | 10,000,125    |   |   | -           |   |   | -        |   |   | -           |   |   | 10,000,125         |  
|Share-based payments                        | 13 (b) |  | -          |  |   | -             |   |   | 452,780     |   |   | -        |   |   | -           |   |   | 452,780            |  
|Share issuance costs, net of tax            | 13 (a) |  | -          |  |   | (680,408      | ) |   | -           |   |   | -        |   |   | -           |   |   | (680,408           | )
|Exercise of stock options                   | 13 (a) |  | 690,000    |  |   | 404,944       |   |   | (184,094    | ) |   | -        |   |   | -           |   |   | 220,850            |  
|Expiry of stock options                     | 13 (b) |  | -          |  |   | -             |   |   | (1,159      | ) |   | -        |   |   | 1,159       |   |   | -                  |  
|Exercise of warrants                        | 13 (a) |  | 37,500     |  |   | 29,625        |   |   | -           |   |   | (1,500   | ) |   | -           |   |   | 28,125             |  
|Expiry of warrants                          | 13 (c) |  | -          |  |   | -             |   |   | (329,194    | ) |   | (202,979 | ) |   | 532,173     |   |   | -                  |  
|Net loss for the year                       |        |  | -          |  |   | -             |   |   | -           |   |   | -        |   |   | (1,667,807  | ) |   | (1,667,807         | )
|Balance, December 31, 2014                  |        |  | 75,368,498 |  | $ | 51,881,960    |   | $ | 2,513,122   |   | $ | -        |   | $ | (23,702,847 | ) | $ | 30,692,235         |  

The accompanying notes are an integral part of these
financial statements.

84

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NOTES TO THE FINANCIAL STATEMENTSFor the years ended December 31, 2014 and
December 31, 2013,and ten months ended December
31, 2012(Expressed in Canadian dollars)

1.         
Nature and Continuance of Operations

Hemisphere Energy Corporation (the "Company") was incorporated
under the laws of British Columbia on March 6, 1978. The Companys principal
business is the acquisition, exploration, development and production of
petroleum and natural gas interests in Canada. It is a publicly traded company
listed on the TSX Venture Exchange under the symbol "HME". The Companys head
office is located at Suite 2000, 1055 West Hastings Street, Vancouver, British
Columbia, Canada V6E 2E9.

2.          Basis of Presentation

| | (a) | Statement of compliance                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | These financial statements are prepared in accordance
      with International Financial Reporting Standards ("IFRS"), as issued by
      the International Accounting Standards Board ("IASB").                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | These financial statements were authorized for issuance
      by the Board of Directors on April 21, 2015.                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (b) | Basis of presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | These financial statements have been prepared on a
      historical cost basis, except for financial instruments and share-based
      payments, which are stated at their fair values. In addition, these
      financial statements have been prepared using the accrual basis of
      accounting, except for cash flow information.                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | During 2012, the Company changed its year end from
      February 29 to December 31, resulting in a ten month period presented for
      the December 31, 2012 financial statements.                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (c) | Functional and presentation currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | These annual financial statements are presented in
      Canadian dollars, which is the Companys functional currency.                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (d) | Use of estimates and judgments                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | The preparation of these financial statements in
      conformity with IFRS requires management to make judgments, estimates and
      assumptions that may affect the application of accounting policies and the
      reported amounts of assets, liabilities, income and expenses. Actual
      results may materially differ from these estimates. Revisions to
      accounting estimates are recognized in the year in which the estimates are
      revised and in any future years affected.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | The following are the accounting policies that are
      subject to such judgments and the key sources of estimation uncertainty
      that the Company believes could have the most significant impact on the
      reported results and financial position.                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Critical accounting judgments                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | Reserves                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     | The estimate of oil and natural gas reserves is integral
      to the calculation of the amount of depletion charged to the statements of
      loss and comprehensive loss and is also a key determinant in assessing
      whether the carrying value of any of the Companys development and
      production assets have been impaired. Changes in reported reserves
can impact asset carrying values due to changes in expected future cash
flows.                                             

85

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The Companys Proved and Probable
reserves are evaluated and reported on by independent reserve engineers at least
annually in accordance with Canadian Securities Administrators National
Instrument 51-101 Standards of Disclosure of Oil and Gas Activities ("NI
51-101"). Proved reserves are those reserves that can be estimated with a high
degree of certainty to be recoverable. It is 90% likely that the actual
remaining quantities recovered will exceed the estimated Proved reserves.
Probable reserves are those additional reserves that are less certain to be
recovered than Proved reserves. Reserve estimation is based on a variety of
factors including engineering data, geological and geophysical data, projected
future rates of production, commodity pricing and timing of future expenditures,
all of which are subject to significant judgment and interpretation.

Identification of cash-generating
units ("CGUs")

The Companys assets are aggregated
into CGUs for the purpose of calculating impairment. CGUs are based on an
assessment of the units ability to generate independent cash inflows. The
determination of these CGUs was based on managements judgment in regards to
shared infrastructure, geographical proximity, petroleum type and similar
exposure to market risk and materiality.

Recoverability of asset carrying
values

At each reporting date, the Company
assesses its petroleum and natural gas properties and exploration and evaluation
assets for possible impairment, to determine if there is any indication that the
carrying amounts of the assets may not be recoverable. An assessment is also
made at each reporting date to determine whether there is an indication that
previously recognized impairment losses no longer exist or have decreased.
Determination as to whether and how much an asset is impaired, or no longer
impaired, involves management estimates on highly uncertain matters such as
future commodity prices, discount rates, production profiles, operating costs,
future capital costs and reserves. Changes in circumstances may impact these
estimates which may impact the recoverable amount of assets. Any change in the
impairment loss or reversal of impairment loss could have a material financial
impact in future periods but future depletion expense would be impacted as a
result.

Critical accounting estimates

Decommissioning obligations

Decommissioning costs will be incurred
by the Company many years into the future. Amounts recorded for decommissioning
obligations require the use of managements best estimates of future
decommissioning expenditures, expected timing of expenditures and future
inflation rates. The estimates are based on internal and third party information
and calculations are subject to changes in laws and regulations, public
expectations, prices, discovery and analysis of site conditions, and changes in
clean up technology. Actual costs and outflows can differ from estimates and may
have a material impact on earnings or financial position. For more information
on the Companys decommissioning obligations, see Note 10.

Business combination

Business combinations are accounted
for using the acquisition method. Under this method, management makes estimates
of the fair value of assets acquired and liabilities assumed which includes
assessing the value of petroleum and natural gas properties based upon the
estimation of recoverable quantities of Proved and Probable reserves being
acquired.

86

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Share-based payments

The Company measures the cost of its
share-based payments to directors, officers, employees and consultants by
reference to the fair value of the equity instruments using the Black-Scholes
option pricing model at the date they are granted. The assumptions used in
determining fair value include: expected life of the options, risk-free rates of
return and stock price volatility. Changes to assumptions may have a material
impact on the amounts presented. For more information on the Companys
share-based payments see Note 13(b).

Income taxes

Related assets and liabilities are
recognized for the estimated tax consequences between amounts included in the
financial statements and their tax base using substantively enacted future
income tax rates. Timing of future revenue streams and future capital spending
changes can affect the timing of any temporary differences, and accordingly,
affect the amount of the deferred tax asset or liability calculated at a point
in time. These differences could materially impact earnings.

87

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3.         Significant Accounting
Policies

| | (a) | Financial instruments
| | --- | ---------------------
| |     |                      
| |     | (i)                  
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      
| |     |                      

88

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| | (ii)  | Financial liabilities                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |       | Borrowings and other financial
  liabilities                                                                                                                                                                                                                                                                                                                                                                                          
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |       | Borrowings and other financial liabilities are
      non-derivatives and are recognized initially at fair value, net of
      transaction costs incurred, and are subsequently stated at amortized cost.
      Any difference between the amounts originally received, net of transaction
      costs, and the redemption value is recognized in profit or loss over the
      period to maturity using the effective interest method.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |       | Borrowings and other financial liabilities are classified
      as current or non-current based on their maturity date. Financial
      liabilities are comprised of accounts payable and accrued liabilities and
      bank indebtedness.                                                                                                                                                                                            
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | (iii) | Fair value hierarchy                                                                                                                                                                                                                                                                                                                                                                                                                  
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |       | Fair value measurements of financial instruments are
      required to be classified using a fair value hierarchy that reflects the
      significance of inputs in making the measurements. The levels of the fair
      value hierarchy are defined as follows:                                                                                                                                                                     
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |       | Level 1 - Quoted prices (unadjusted) in active markets
      for identical assets or liabilities.                                                                                                                                                                                                                                                                                                                                     
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |       | Level 2 - Inputs other than quoted prices included within
      Level 1 that are observable for the asset or liability, either directly or
      indirectly.                                                                                                                                                                                                                                                                          
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |       | Level 3 - Inputs for the asset or liability that are not
      based on observable market data.                                                                                                                                                                                                                                                                                                                                       

| |     | Additional disclosure on the measurement of financial
      instruments is provided in Note 5.                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (b) | Revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | Revenue from the sale of petroleum and natural gas is
      recorded when title passes to an external party and is based on volumes
      delivered to customers at contractual delivery points and rates, and
      collectability is reasonably assured. The costs associated with delivery,
      including operating and maintenance costs, transportation and royalty
      expenses, are recognized during the same period in which the related
      revenue is earned and reported.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | (c) | Joint interest operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | Some of the Companys petroleum and natural gas
      activities are jointly conducted with other venturers who have direct
      ownership in and jointly control the operations of the ventures.
      Accordingly the financial statements reflect the Companys share of joint
      assets, liabilities, revenues and expenses.                                                                                                                                                       

89

---

| | (d) | Property and equipment and exploration and evaluation
      assets
| | --- | ------------------------------------------------------------------
| |     |                                                                   
| |     | (i)                                                               
| |     |                                                                   
| |     |                                                                   
| |     |                                                                   
| |     | (ii)                                                              
| |     |                                                                   
| |     |                                                                   
| |     |                                                                   
| |     |                                                                   
| |     |                                                                   
| |     |                                                                   
| |     |                                                                   
| |     | (iii)                                                             
| |     |                                                                   
| |     |                                                                   
| |     |                                                                   
| |     |                                                                   
| |     |                                                                   
| |     | (iv)                                                              
| |     |                                                                   
| |     |                                                                   
| |     |                                                                   
| |     | (v)                                                               
| |     |                                                                   
| |     |                                                                   

90

---

The calculation of depletion and
depreciation is based on total capitalized costs plus estimated future
development costs of Proved and Probable non-producing and undeveloped reserves
less the estimated net realizable value of production equipment and facilities
after the Proved reserves are fully produced.

Proved reserves are estimated using
independent reserve engineer reports and represent the estimated quantities of
crude oil, natural gas and natural gas liquids, which geological, geophysical
and engineering data demonstrate with a specified degree of certainty to be
recoverable in future years from known reservoirs and which are considered
commercially producible. There should be a 50 percent statistical probability
that the actual quantity of recoverable reserves will be more than the amount
estimated as Proved and Probable and a 50 percent statistical probability that
it will be less. The equivalent statistical probabilities for the proved
component of Proved and Probable reserves are 90 percent and 10 percent,
respectively.

Such reserves may be considered
commercially producible if management has the intention of developing and
producing them. Such intention is based upon:

| |  | A reasonable assessment of the future economics of such
      production;                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | A reasonable expectation that there is a market for all
      or substantially all the expected oil and natural gas production; and
| |  | Evidence that the necessary production, transmission and
      transportation facilities are available or can be made available.   

| |      | Reserves may only be considered Proved if supported by
      either actual production or conclusive formation tests. The area of
      reservoir considered Proved includes (a) that portion delineated by
      drilling and defined by as-oil and/or oil-water contacts, if any, or both,
      and (b) the immediately adjoining portions not yet drilled, but which can
      be reasonably judged as economically productive on the basis of available
      geophysical, geological and engineering data. In the absence of
      information on fluid contacts, the lowest known structural occurrence of
      oil and natural gas controls the lower Proved limit of the
    reservoir.                                                
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      | Reserves that can be produced economically through
      application of improved recovery techniques such as fluid injection are
      only included in the Proved classification when successful testing by a
      pilot project, the operation of an installed program in the reservoir or
      other reasonable evidence (such as, experience of the dame techniques on
      similar reservoirs or reservoir simulation studies) provides support for
      the engineering analysis on which the project or program was
  based.                                                                                                                                                                                                         
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      | Depreciation of other equipment is provided for on a
      20-30% declining balance basis. Depreciation methods, useful lives and
      residual values are reviewed at each reporting date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (vi) | Impairment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      | Exploration and evaluation assets are assessed for
      impairment when they are reclassified to developing and producing assets,
      as petroleum and natural gas properties, and also if facts and
      circumstances suggest that the carrying amount exceeds the recoverable
      amount.                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |      | An impairment is recorded when the recoverable amount of
      an asset is less than the respective carrying amount. Recoverable amount
      is the higher of its fair value less cost to sell and value in use. Fair
      value is the price that would be received from selling an asset in an
      orderly transaction between market participants. Fair value less costs to
      sell can be determined by using an observable market or by using
      discounted future net cash flows of Proved and Probable reserves using
      forecasted prices and costs. Value in use is determined by estimating the
      present value of the future net cash flows expected to be derived from the
      continued use of the asset or CGU.

91

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Exploration and evaluation assets are
grouped together with the Company's CGUs when they are assessed for impairment,
both at the time of any triggering facts and circumstances as well as upon their
eventual reclassification to developing and producing assets (petroleum and
natural gas properties).

An impairment loss is recognized if
the carrying amount of an asset or its CGU exceeds its estimated recoverable
amount. A CGU's recoverable amount is the higher of its fair value less costs to
sell and its value in use. Impairment losses are recognized in profit or loss.
Impairment losses recognized in respect of CGUs are allocated first to reduce
the carrying amount of goodwill, if any, allocated to the units and then to
reduce carrying amounts of other assets in the unit (group of units) on a pro
rata basis.

Impairment losses recognized in prior
years are assessed at each reporting date for any indications that the loss has
decreased or no longer exists. An impairment loss is reversed if there has been
a change in the estimates used to determine the recoverable amount. An
impairment loss is reversed only to the extent that the asset's carrying amount
does not exceed the carrying amount that would have been determined, net of
depletion and depreciation, if no impairment loss had been recognized.

| | (e) | Decommissioning obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | Decommissioning obligations are measured at the present
      value of managements best estimate of expenditures required to settle the
      present obligation at the statement of financial position date. Subsequent
      to the initial measurement, the obligation is adjusted at the end of each
      period to reflect the passage of time and changes in the estimated future
      cash flows underlying the obligation. The increase in the provision due to
      the passage of time is recognized as finance costs whereas
      increases/decreases due to changes in the estimated future cash flows are
      capitalized. Actual costs incurred upon settlement of the decommissioning
      obligations are charged against the provision.                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (f) | Share-based payments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | The Company has a stock option plan that is described in
      Note 13(b). Share-based payments to employees are measured at the fair
      value of the instruments issued and are amortized over the vesting
      periods. Share-based payments to non-employees are measured at the fair
      value of the goods or services received or the fair value of the equity
      instruments issued, if it is determined the fair value of the goods or
      services cannot be reliably measured, and are recorded at the date the
      goods or services are received. The amount recognized as an expense is
      adjusted to reflect the number of awards expected to vest. The offset to
      the recorded cost is to share-based payments reserve. Consideration
      received on the exercise of stock options is recorded as capital stock and
      the related share-based payments reserve is transferred to capital stock.
      Charges for options that are forfeited before vesting are reversed from
      share-based payments reserve. For those options that expire after vesting,
      the recorded value is transferred to deficit.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (g) | Equity units                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | The Company uses the residual value method with respect
      to the measurement of equity units. The proceeds from the issue of units
      is allocated between common shares and share purchase warrants on a
      residual value basis, wherein the fair value of the common shares is based
      on the market close on the date the units are issued; the balance, if any,
      is allocated to the attached warrants. Share issue costs are netted
      against share proceeds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (h) | Flow-through shares and units                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     | The Company may, from time to time, issue flow-through
      common shares to finance its petroleum and natural gas exploration
      activities. Canadian income tax law permits the Company to renounce to
      the flow-through shareholders the income tax attributes of
      certain petroleum and natural gas exploration and evaluation costs
      financed by such shares. A liability is recognized for any premium on the
      flow- through shares and is subsequently reversed as the Company incurs
      qualifying Canadian exploration expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

92

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| |     | In circumstances where the Company has issued
      flow-through shares by way of a unit offering, the proceeds are allocated
      first to common shares based on the market close at the time the units are
      priced, and any residual value is allocated next to the warrants reserve
      based on the fair value of the warrant component using the Black-Scholes
      option pricing model on grant date. Any remaining residual value is then
      recognized as a liability for the premium on the flow-through
    shares.                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (i) | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Income tax expense comprises current and deferred tax.
      Income tax expense is recognized in profit or loss, except to the extent
      that it relates to items recognized directly in equity, in which case it
      is recognized in equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Current income tax expense is the expected tax payable on
      the taxable income for the year, using tax rates enacted or substantively
      enacted at the reporting date, and any adjustment to tax payable in
      respect of previous years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Deferred income tax is recognized using the balance sheet
      liability method, providing for temporary differences between the carrying
      amounts of assets and liabilities for financial reporting purposes and the
      amounts used for taxation purposes. Deferred income tax is measured at the
      tax rates that are expected to be applied to temporary differences when
      they reverse, based on the laws that have been enacted or substantively
      enacted by the reporting date. Deferred income tax assets and liabilities
      are offset if there is a legally enforceable right to offset and they
      relate to income taxes levied by the same tax authority on the same
      taxable entity, or on different tax entities, but they intend to settle
      current tax liabilities and assets on a net basis or their tax assets and
      liabilities will be realized simultaneously.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | A deferred tax asset is recognized to the extent that it
      is probable that future taxable profits will be available against which
      the temporary difference can be utilized. Deferred income tax assets are
      reviewed at each reporting date and are reduced to the extent that it is
      no longer probable that the related tax benefit will be
realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (j) | Loss per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Basic loss per share is calculated by dividing the profit
      or loss attributable to common shareholders of the Company by the
      weighted-average number of common shares outstanding during the period.
      Diluted earnings per share is determined by adjusting the profit or loss
      attributable to common shareholders and the weighted-average number of
      shares outstanding for the effects of dilutive instruments such as options
      and warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | The Company uses the treasury stock method to compute the
      dilutive effect of options, warrants and similar instruments. Under this
      method the dilutive effect on earnings per share is calculated presuming
      the exercise of outstanding options, warrants and similar instruments. It
      assumes that proceeds received from the exercise of stock options and
      warrants would be used to repurchase common shares at the average market
      price during the year. However, the calculation of diluted loss per share
      excludes the effects of various conversions and exercise of options and
      warrants that would be anti-dilutive.                                                                                                                                                                                                                                                   
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Shares held in escrow other than where their release is
      subject to the passage of time are excluded from the computation of loss
      per share until the conditions for their release are
  satisfied.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

93

---

| | (k) | Changes in accounting
policies
| | --- | ------------------------------

| | a. | Accounting policies adopted                                        
| | -- | -------------------------------------------------------------------
| |    |                                                                    
| |    | Effective January 1, 2014, the Company adopted the
      following:

| | (i)   | Amendment to IAS 36 Impairment of Assets, requires
      additional disclosure on the recoverable amounts of an impaired CGU. The
      adoption of this amendment had no impact on the amounts recorded in the
      financial statements for the year ended December 31, 2014 or on the
      comparative periods                                                              
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                  
| | (ii)  | IFRIC 21 Levies, clarifies the requirements for
      recognizing a liability for a levy imposed by a government. The adoption
      of this standard had no impact on the amounts recorded in the financial
      statements for the year ended December 31, 2014 or on the comparative
      periods.                                                                          
| |       |                                                                                                                                                                                                                                                                                                                                                                                  
| | (iii) | The Company changed its accounting for depleting its
      petroleum and natural gas properties. The Company changed from using the
      unit-of-production method based on production volumes in relation to total
      estimated Proved reserves to total estimated Proved and Probable reserves.
      The change in policy has been applied retrospectively (see Note
  4).

| | b. | Future accounting pronouncements                                                                                                                                                                             
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                              
| |    | The IASB or IFRIC have issued pronouncements effective
      for accounting periods beginning on or after January 1, 2015. Only those
      which may significantly impact the Company are discussed
  below:

| | (i) | IFRS 15 Revenue from Contracts with Customersprovides a single, principles based five- step model to be applied to
      all contracts with customers.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                       
| |     | The five steps in the model are as
  follows:                                                                                                         

| | o | Identify the contract with the
      customer                                       
| | - | ------------------------------------------------------------------------------------
| | o | Identify the performance
      obligations in the contract                          
| | o | Determine the transaction price                                                     
| | o | Allocate the transaction price to
      the performance obligations in the contracts
| | o | Recognize revenue when (or as)
      the entity satisfies a performance obligation. 

| |      | Guidance is provided on topics such as the point in which
      revenue is recognized, accounting for variable consideration, costs of
      fulfilling and obtaining a contract and various related matters. New
      disclosures about revenue are also introduced.                        
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                               
| |      | Applicable to the Company's annual period beginning on
      January 1, 2017. The Company has not assessed the impact of this
      pronouncement.                                                                                                                                            
| |      |                                                                                                                                                                                                                                                                                               
| | (ii) | IFRS 9 Financial Instruments (2014)is a finalized
      version of IFRS 9, which contains accounting requirements for financial
      instruments, replacing IAS 39 Financial Instruments: Recognition and
      Measurement. The standard contains requirements in the following
      areas:

| | o | Classification and measurement. Financial assets are
      classified by reference to the business model within which they are held
      and their contractual cash flow characteristics. The 2014 version of IFRS
      9 introduces a "fair value through other comprehensive income" category
      for certain debt instruments. Financial liabilities are classified in a
      similar manner to under IAS 39; however, there are differences in the
      requirements applying to the measurement of an entity's own credit risk.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | o | Impairment. The 2014 version of IFRS 9 introduces an
      "expected credit loss" model for the measurement of the impairment of
      financial assets, so it is no longer necessary for a credit event to have
      occurred before a credit loss is recognized.                                                                                                                                                                                                                                                                       

94

---

| | o | Hedge accounting. Introduces a new hedge accounting model
      that is designed to be more closely aligned with how entities undertake
      risk management activities when hedging financial and non-financial risk
      exposures.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Applicable to the Company's annual
period beginning on January 1, 2018. The Company has not assessed the impact of
this pronouncement.

4.         Restatement of Previously
Reported Results

The Companys financial statements for the periods ended
December 31, 2013, January 1, 2013 and December 31, 2012, have been restated for
the following items:

Property and equipment

Depreciation and depletion

The Company changed its accounting for depleting its petroleum
and natural gas properties. The Companys acquisition of its core Jenner and
Atlee Buffalo properties resulted in higher Proved plus Probable reserves. With
the Companys additional equity financings and banking facilities, its ability
and plans have expanded to further the development of its exploration assets and
Probable reserves. As a result, the Company changed from using the
unit-of-production method based on production volumes in relation to total
estimated Proved reserves to total estimated Proved and Probable reserves. This
both accurately reflects the change in circumstance and aligns the Companys
method of estimating depletion with the majority of petroleum and natural gas
producing companies. The change in accounting policy has been applied
retrospectively, and accordingly, the Company has revised certain prior year
amounts.

Impairment

As a result of the Company changing its accounting to include
Proved and Probable reserves, the impairment of property and equipment has been
revised. In addition, the Company reassessed its indicators of impairment on its
core petroleum and natural gas properties, which resulted in a decrease of
impairment of $5,084,200 for the year ended December 31, 2013.

Decommissioning obligations

In determining decommissioning obligations, the Company has
changed its estimate using the information as set out by the Alberta Energy
Regulator ("AER") in Directive 011, as its primary source of estimating future
abandonment and reclamation costs.

95

---

The following table outlines the effect of the changes made to
the financial statements as originally filed:

Impact on the Statements of Financial Position as at
December 31, 2013 and January 1, 2013

As at December 31, 2013
    
    
    As at January 1, 2013Previously
    
    
    
    
    
    
    
    
    PreviouslyReported
    
    
    Change
    
    
    Restated
    
    
    Reported
    
    
    Change
    
    
    Restated$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Exploration and evaluation
      assets
    
    1,894,497
    
    
    106,116
    
    
    2,000,613
    
    
    3,189,762
    
    
    (1,422,906
    )
    
    1,766,856Property and equipment
    
    23,541,568
    
    
    3,869,877
    
    
    27,411,445
    
    
    20,152,828
    
    
    271,591
    
    
    20,424,419Deferred tax asset
    
    2,387,321
    
    
    (854,916
    )
    
    1,532,405
    
    
    912,087
    
    
    262,745
    
    
    1,174,832Total assets
    
    29,075,500
    
    
    3,120,077
    
    
    32,195,577
    
    
    25,375,435
    
    
    (888,570
    )
    
    24,486,865Decommissioning obligations
    
    1,323,446
    
    
    687,836
    
    
    2,011,282
    
    
    467,235
    
    
    -
    
    
    467,235Deficit
    
    (25,001,614
    )
    
    2,433,242
    
    
    (22,568,372
    )
    
    (21,242,708
    )
    
    (888,570
    )
    
    (22,131,278
    )Total shareholders equity
    
    19,905,328
    
    
    2,433,242
    
    
    22,338,570
    
    
    19,960,382
    
    
    (888,570
    )
    
    19,071,812Total liabilities and shareholders equity
    
    29,074,500
    
    
    3,121,077
    
    
    32,195,577
    
    
    25,375,435
    
    
    (888,570
    )
    
    24,486,865


96

---

Impact on the Statements of Loss and Comprehensive Loss for
the year ended December 31, 2013, and the 10 months ended December 31, 2012

Year ended December 31, 2013
    
    
    10 months ended December 31, 2012Previously
    
    
    
    
    
    
    
    
    PreviouslyReported
    
    
    Change
    
    
    Restated
    
    
    Reported
    
    
    Change
    
    
    Restated$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Depletion and depreciation
    
    3,088,965
    
    
    644,728
    
    
    3,733,693
    
    
    2,239,706
    
    
    703,556
    
    
    2,943,262Impairment of property and equipment
    
    5,640,571
    
    
    (5,084,200
    )
    
    556,371
    
    
    184,938
    
    
    -
    
    
    184,938Income (loss) before income taxes
    
    (5,307,311
    )
    
    4,439,472
    
    
    (867,839
    )
    
    543,818
    
    
    (703,556
    )
    
    (159,738
    )Deferred tax (expense) recovery
    
    1,475,234
    
    
    (1,117,661
    )
    
    357,573
    
    
    (482,458
    )
    
    170,151
    
    
    (312,307
    )Net income (loss) and comprehensive income
      (loss)
    
    (3,832,078
    )
    
    3,321,812
    
    
    (510,266
    )
    
    61,361
    
    
    (533,406
    )
    
    (472,045
    )Net income (loss) per share - basic and diluted
    
    (0.07
    )
    
    
    
    
    (0.01
    )
    
    0.00
    
    
    
    
    
    (0.01
  )


Impact on the Statements of Cash Flows for the year ended
December 31, 2013, and the 10 months ended December 31, 2012

Year ended December 31, 2013
    
    
    10 months ended December 31, 2012Previously
    
    
    
    
    
    
    
    
    PreviouslyReported
    
    
    Change
    
    
    Restated
    
    
    Reported
    
    
    Change
    
    
    Restated$
    
    
    $
    
    
    $
    
    
    $
    
    
    $
    
    
    $Net income (loss)
    
    (3,832,078
    )
    
    3,321,812
    
    
    (510,266
    )
    
    61,361
    
    
    (533,406
    )
    
    (472,045
    )Depletion, depreciation, and accretion
    
    3,095,478
    
    
    644,728
    
    
    3,740,206
    
    
    2,254,029
    
    
    703,556
    
    
    2,957,585Impairment of property and equipment
    
    5,640,571
    
    
    (5,084,200
    )
    
    556,371
    
    
    184,938
    
    
    -
    
    
    184,938Deferred tax (expense) recovery
    
    1,475,234
    
    
    (1,117,662
    )
    
    357,572
    
    
    (482,458
    )
    
    170,151
    
    
    (312,307
    )Cash provided by operating activities
    
    3,665,274
    
    
    -
    
    
    3,665,274
    
    
    3,672,632
    
    
    -
    
    
    3,672,632


97

---

As shown in the table above, all adjustments affected only
non-cash items; therefore, there was no impact to cash provided by operating
activities and no impact to cash used in investing activities or cash provided
by financing activities.

5.         Financial Instruments

Fair value estimates of financial instruments are made at a
specific point in time, based on relevant information about financial markets
and specific financial instruments. As these estimates are subjective in nature,
involving uncertainties and matters of significant judgment, changes in
assumptions can significantly affect estimated fair values. At December 31,
2014, the Company's financial instruments include accounts receivable,
reclamation deposits, bank indebtedness, and accounts payable and accrued
liabilities.

The fair values of accounts receivable, reclamation deposits,
accounts payable and accrued liabilities, and bank indebtedness approximate
their carrying values due to the short-term maturity of these financial
instruments.

6.         Financial Risk
Management

The Companys activities expose it to a variety of financial
risks that arise as a result of its exploration, development, production and
financing activities such as credit risk, liquidity risk and market risk. This
note presents information about the Companys exposure to each of these risks.
Management sets controls to manage such risks and monitors them on an ongoing
basis pertaining to market conditions and the Companys activities.

| | (a) | Credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | Credit risk is the risk of financial loss to the Company
      if a customer or counterparty to a financial instrument fails to meet its
      payment obligations. This risk arises principally from the Companys
      receivables from joint operators and oil and natural gas marketers, and
      reclamation deposits. The credit risk associated with reclamation deposits
      is minimized substantially by ensuring this financial asset is placed with
      major financial institutions with strong investment-grade ratings by a
      primary ratings agency. The credit risk associated with accounts
      receivable is mitigated as the Company monitors monthly balances to limit
      the risk associated with collections. The Company does not anticipate any
      default. There are no balances past due or impaired.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |     | The maximum exposure to credit risk is as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| |                                       |   | December 31, |  |   | December 31, | 
| | ------------------------------------- | - | ------------ |  | - | ------------ | 
| |                                       |   | 2014         |  |   | 2013         | 
| |                                       |   |              |  |   |              | 
| | Accounts receivable                   |   |              |  |   |              | 
| |                                       |   |              |  |   |              | 
| | Trade receivables                     | $ | 1,041,843    |  | $ | 927,768      | 
| |                                       |   |              |  |   |              | 
| | Receivable from joint
      operators |   | 95,355       |  |   | 42,663       | 
| |                                       |   |              |  |   |              | 
| | Reclamation deposits                  |   | 105,535      |  |   | 105,535      | 
| |                                       |   |              |  |   |              | 
| |                                       | $ | 1,242,733    |  | $ | 1,075,966    | 

| |     | The Company sells the majority of its oil production to a
      single oil marketer and, therefore, is subject to concentration risk which
      is mitigated by managements policies and practices related to credit
      risk, as discussed above. The Company historically has never experienced
      any collection issues with its oil marketer.                                                                                    
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (b) | Liquidity risk                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     | Liquidity risk is the risk that the Company will not be
      able to meet its financial obligations as they become due. The Companys
      approach to managing liquidity risk is to ensure, as far as possible, that
      it will have sufficient liquidity to meet its liabilities when they become
      due, under both normal and stressed conditions, without incurring
      unacceptable losses or risking damage to the Company.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                             

98

---

| |     | At December 31, 2014, the Company had negative working
      capital of $11,644,609 (December 31, 2013 - $6,330,906), which includes
      bank indebtedness of $7,184,147 (December 31, 2013 - $4,500,000). The
      Company funds its operations through production revenue and a demand
      operating credit facility (Note 12). All of the Companys financial
      liabilities have contractual maturities of less than 90 days.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | (c) | Market risk                                                                                                                                                                                                                                                                                                                                                                                                                              
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | Market risk is the risk that changes in market prices,
      such as foreign exchange rates, other prices and interest rates will
      affect the value of the financial instruments. Market risk is comprised of
      interest rate risk, foreign currency risk, commodity price risk and other
      price risk.                                                                                                                     

| | (i)   | Interest rate risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |       | Interest rate risk is the risk that future cash flows
      will fluctuate as a result of changes in market interest rates. Borrowings
      under the Companys credit facilities are subject to variable interest
      rates. A one percent change in interest rates would not have a material
      effect on net loss and comprehensive loss.                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (ii)  | Foreign currency risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |       | The Companys functional and reporting currency is the
      Canadian dollar. The Company does not sell or transact in any foreign
      currency; however, commodity prices are largely denominated in United
      States dollars ("USD"), and as a result the prices that the Company
      receives are affected by fluctuations in the exchange rates between the
      USD and the Canadian dollar. The exchange rate effect cannot be
      quantified, but generally an increase in the value of the Canadian dollar
      compared to the USD will reduce the prices received by the Company for its
      crude oil and natural gas sales. The Company did not have any foreign
      exchange rate swaps or related contracts in place as at the date of this
      document.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (iii) | Commodity price risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |       | Commodity prices for petroleum and natural gas are
      impacted by global economic events that dictate the levels of supply and
      demand, as well as the relationship between the Canadian dollar and the
      USD. Significant changes in commodity prices may materially impact the
      Companys ability to raise capital. The Company has not entered into any
      commodity hedge contracts as at the date of this document.                                                                                                                                                                                                                                                                                                                                            
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | (iv)  | Other price risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |       | Other price risk is the risk that the fair value or
      future cash flows of a financial instrument will fluctuate due to changes
      in market prices, other than those arising from interest rate risk or
      foreign currency risk. The Company is not exposed to significant other
      price risk.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

99

---

7.         Capital
Management

The Company manages its capital with the following objectives:

| | (a) | To ensure sufficient financial flexibility to achieve the
      Companys ongoing business objectives including the replacement of
      production, funding of future growth opportunities and pursuit of
      accretive acquisitions; and
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                             
| | (b) | To maximize shareholder return through enhancing the
      Companys share value.                                                                                                                                                           

The Company monitors its capital structure and makes
adjustments according to market conditions in an effort to meet its objectives
given the current outlook of the Company and industry in general. The capital
structure of the Company is composed of shareholders equity and the undrawn
component of the Companys credit facilities. The Company may manage its capital
structure by issuing new shares, repurchasing outstanding shares, obtaining
additional financing from the Companys credit facilities, issuing new debt
instruments or other financial or equity-based instruments, adjusting capital
spending or disposing of assets. The capital structure is reviewed on an ongoing
basis.

The Companys capital structure as at December 31, 2014 and
2013 is as follows:

|                                            |   | December 31, |  |   | December 31, | 
|------------------------------------------- | - | ------------ |  | - | ------------ | 
|                                            |   | 2014         |  |   | 2013         | 
|                                            |   |              |  |   |              | 
|Shareholders equity                        | $ | 30,692,235   |  | $ | 22,338,570   | 
|                                            |   |              |  |   |              | 
|Undrawn component of bank credit facilities |   | 7,815,853    |  |   | 6,000,000    | 
|                                            |   |              |  |   |              | 
|Total capital                               | $ | 38,508,088   |  | $ | 28,338,570   | 

As at December 31, 2014, the Company had total available credit
facilities of $15,000,000 (December 31, 2013 - $10,500,000) of which the Company
had drawn $7,184,147 (December 31, 2013 - $4,500,000) (Note 12). At December 31,
2014, the Company was subject to externally imposed capital requirements as
described in Note 12.

8.        Exploration and Evaluation
Assets

Exploration and evaluation assets consist of the Companys
exploration projects, which are pending the determination of Proved and Probable
reserves. A transfer from exploration and evaluation assets to property and
equipment is made when the well has come on production or the exploration
project has been completed. For the year ended December 31, 2014, the Company
transferred $993,271 (December 31, 2013 - $1,185,051) to property and
equipment.

|Cost                               |   |           |  
|---------------------------------- | - | --------- | -
|                                   |   |           |  
|Balance February 29, 2012          | $ | 1,798,416 |  
|                                   |   |           |  
|Additions                          |   | 740,758   |  
|                                   |   |           |  
|Exploration and evaluation expense |   | (120,882  | )
|                                   |   |           |  
|Transfer to property and equipment |   | (651,436  | )
|                                   |   |           |  
|Balance, December 31, 2012         |   | 1,766,856 |  

100

---

|Additions                          |   | 1,534,814  |  
|---------------------------------- | - | ---------- | -
|                                   |   |            |  
|Exploration and evaluation expense |   | (116,006   | )
|                                   |   |            |  
|Transfer to property and equipment |   | (1,185,051 | )
|                                   |   |            |  
|Balance, December 31, 2013         |   | 2,000,613  |  
|                                   |   |            |  
|Additions                          |   | 2,080,432  |  
|                                   |   |            |  
|Exploration and evaluation expense |   | (190,887   | )
|                                   |   |            |  
|Transfer to property and equipment |   | (993,271   | )
|                                   |   |            |  
|Balance, December 31, 2014         | $ | 2,896,887  |  

9.          Property and
Equipment

|                                                                        |   | Petroleum and |  |   |                 |  |   |            | 
|----------------------------------------------------------------------- | - | ------------- |  | - | --------------- |  | - | ---------- | 
|                                                                        |   | Natural Gas   |  |   | Other Equipment |  |   | Total      | 
|                                                                        |   |               |  |   |                 |  |   |            | 
|Cost                                                                    |   |               |  |   |                 |  |   |            | 
|Balance, February 29, 2012                                              | $ | 15,948,386    |  | $ | 67,522          |  | $ | 16,015,908 | 
|Additions                                                               |   | 11,242,126    |  |   | -               |  |   | 11,242,126 | 
|Transfer from exploration and evaluation assets                         |   | 651,436       |  |   | -               |  |   | 651,436    | 
|Balance, December 31, 2012                                              |   | 27,841,948    |  |   | 67,522          |  |   | 27,909,470 | 
|Additions                                                               |   | 10,092,039    |  |   | -               |  |   | 10,092,039 | 
|Transfer from exploration and evaluation assets                         |   | 1,185,051     |  |   | -               |  |   | 1,185,051  | 
|Balance, December 31, 2013                                              |   | 39,119,038    |  |   | 67,522          |  |   | 39,186,560 | 
|Additions                                                               |   | 22,482,341    |  |   | 46,970          |  |   | 22,529,311 | 
|Transfer from exploration and evaluation assets                         |   | 993,271       |  |   | -               |  |   | 993,271    | 
|Balance, December 31, 2014                                              | $ | 62,594,650    |  | $ | 114,492         |  | $ | 62,709,142 | 
|Accumulated Depletion, Depreciation, Amortization and Impairment Losses |   |               |  |   |                 |  |   |            | 
|Balance, February 29, 2012                                              | $ | 4,311,939     |  | $ | 44,912          |  | $ | 4,356,851  | 
|                                                                        |   |               |  |   |                 |  |   |            | 
|Charge for period                                                       |   | 2,938,194     |  |   | 5,068           |  |   | 2,943,262  | 
|Impairment loss                                                         |   | 184,938       |  |   | -               |  |   | 184,938    | 
|Balance, December 31, 2012                                              |   | 7,435,071     |  |   | 49,980          |  |   | 7,485,051  | 
|Charge for year                                                         |   | 3,729,169     |  |   | 4,524           |  |   | 3,733,693  | 
|Impairment loss                                                         |   | 556,371       |  |   | -               |  |   | 556,371    | 
|Balance, December 31, 2013                                              |   | 11,720,611    |  |   | 54,504          |  |   | 11,775,115 | 
|Charge for year                                                         |   | 5,353,585     |  |   | 7,404           |  |   | 5,360,989  | 
|Impairment loss                                                         |   | 2,702,925     |  |   | -               |  |   | 2,702,925  | 
|Balance, December 31, 2014                                              | $ | 19,777,121    |  | $ | 61,908          |  | $ | 19,839,029 | 
|Net Book Value                                                          |   |               |  |   |                 |  |   |            | 
|December 31, 2013                                                       | $ | 27,398,427    |  | $ | 13,018          |  | $ | 27,411,445 | 
|December 31, 2014                                                       | $ | 42,817,529    |  | $ | 52,584          |  | $ | 42,870,113 | 

101

---

| | (a) | Property acquisitions for the year ended December 31,
      2014:                                                                                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                             
| |     | Property acquisitions not constituting a business
      combination                                                                                                                                                                                                                         
| |     |                                                                                                                                                                                                                                                                                             
| |     | On February 28, 2014, the Company closed an acquisition
      of a non-producing property for proceeds of $100,000 which included 1.75
      sections (1,120 acres) in the surrounding Jenner area.                                                                                         
| |     |                                                                                                                                                                                                                                                                                             
| |     | On May 29, 2014, the Company closed an acquisition in the
      Atlee Buffalo property for proceeds of $510,000 which included an 85%
      working interest in 1.75 sections (1,120 acres) of land adjacent to the
      Companys existing Atlee property.                                
| |     |                                                                                                                                                                                                                                                                                             
| |     | During the year ended December 31, 2014, the Company also
      purchased property mineral lease rights for total proceeds of $247,296 in
      various Crown land sales through the Alberta Department of Energy. The
      leases purchased were located in both Jenner and Atlee Buffalo.
| |     |                                                                                                                                                                                                                                                                                             
| | (b) | Property acquisitions for the year ended December 31,
      2013:                                                                                                                                                                                                                           

| | (i) | Property acquisitions constituting a business
      combination                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | On November 14, 2013, the Company closed the acquisition
      of the oil and gas assets in the Atlee Buffalo property in southeastern
      Alberta. The Company acquired a 100% working interest in land and tangible
      assets in the Atlee Buffalo property for total cash consideration of
      $3,155,195 (net of June to September 2013 net production revenue). The
      fair value of the net assets acquired was equal to the cash consideration
      paid, and no goodwill or bargain purchase gain was recorded in the
      transaction.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |     | Estimated fair value of acquired
  properties:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | Exploration and evaluation assets | $ | 477,000   |  
| | --------------------------------- | - | --------- | -
| |                                   |   |           |  
| | Property and equipment            |   | 3,153,195 |  
| |                                   |   |           |  
| | Decommissioning obligation        |   | (475,000  | )
| |                                   |   |           |  
| | Total                             | $ | 3,155,195 |  

| | (ii) | Property acquisitions not constituting a business
      combination                                                                                                                                                                       
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                           
| |      | During the 2013 fiscal year, the Company also purchased
      properties for total expenditures of $132,582 in various Crown land sales
      through the Alberta Department of Energy. These properties were all
      located in Jenner.

During the year ended December 31, 2014, the Company performed
an assessment of potential impairment indicators, and management determined that
with the recent decline in commodity prices that an impairment test on its
petroleum and natural gas assets was required. It was determined that the
carrying amount of three CGUs exceeded their recoverable amounts aggregating
$25,389,350 for the year ended December 31, 2014 (year ended December 31, 2013 -
$145,800; ten months ended December 31, 2012 - $442,000). Accordingly, the
Company recognized an impairment charge of $2,702,925 for the year ended
December 31, 2014 (year ended December 31, 2013 - $556,371; ten months ended
December 31, 2012 - $184,938). The recoverable amounts were determined with fair
value less costs to sell using a discounted cash flow method and categorized in
Level 3 of the fair value hierarchy. Key assumptions in the determination of
cash flows from reserves include crude oil and natural gas prices, loss factors
and discount rates specific to the underlying composition of assets residing in
each CGU. The pre-tax discount rates ranged from 10% to 15% depending on the
nature of the reserves. The following table show the future commodity price estimates used by the Companys
independent reserves evaluator at December 31, 2014 and 2013:

102

---

2014
    2015
    2016
    2017
    2018
    2019
    2020
    2021
    2022
    ThereafterWTI (US$/bbl)
    65.00
    75.00
    80.00
    84.90
    89.30
    93.80
    95.70
    97.60
    +2%/yrWCS (C$/bbl)
    57.60
    69.90
    74.70
    79.70
    83.70
    87.90
    89.80
    91.60
    +2%/yrAECO(Cdn$/MMbtu)
    3.50
    4.00
    4.25
    4.50
    4.70
    5.00
    5.30
    5.50
    +2%/yr


2013
    2014
    2015
    2016
    2017
    2018
    2019
    2020
    2021
    ThereafterWTI (US$/bbl)
    95.00
    95.00
    95.00
    95.00
    95.30
    96.60
    98.50
    100.50
    +2%/yrWCS (C$/bbl)
    76.50
    79.60
    80.40
    80.90
    81.10
    82.20
    83.80
    85.50
    +2%/yrAECO(Cdn$/MMbtu)
    4.00
    4.25
    4.55
    4.75
    5.00
    5.25
    5.35
    5.45
    +2%/yr


10.          Decommissioning
Obligations

The Companys decommissioning obligations result from its net
ownership interest in petroleum and natural gas assets including well sites and
gathering systems. The total decommissioning obligation is estimated based on
the Companys net ownership interest in all wells and facilities, estimated
costs to reclaim and abandon these wells and facilities, and the estimated
timing of the costs to be incurred in future years. The Company uses AER
guidelines for determining abandonment and reclamation estimates.

The Company estimates the total undiscounted amount of cash
flows required to settle its decommissioning obligations as at December 31, 2014
is $5,923,892 (December 31, 2013 - $3,351,041; January 1, 2013 - $467,235).
These payments are expected to be made over the next 38 years with the majority
of costs to be incurred between 2022 and 2038. The discount factor, being the
risk-free rate related to the liability, is 2.40% (December 31, 2013 - 3.32%) .
Inflation of 1.70% (December 31, 2013 - 1.20%) has also been factored into the
calculation. The Company also has $105,535 (December 31, 2013 - $105,535;
January 1, 2013 - $100,535) in various reclamation bonds for its properties held
by the British Columbia Ministry of Energy, Mines and Petroleum Resources.

|                                                       |   | December 31, |  |   | December 31, |  |   | December 31, | 
|------------------------------------------------------ | - | ------------ |  | - | ------------ |  | - | ------------ | 
|                                                       |   | 2014         |  |   | 2013         |  |   | 2012         | 
|Decommissioning obligations, beginning of
      period | $ | 2,011,282    |  | $ | 467,235      |  | $ | 358,428      | 
|Increase in estimated future obligations               |   | 3,099,549    |  |   | 1,537,534    |  |   | 94,484       | 
|Accretion expense                                      |   | 66,776       |  |   | 6,513        |  |   | 14,323       | 
|Decommissioning
      obligations, end of period       | $ | 5,177,607    |  | $ | 2,011,282    |  | $ | 467,235      | 

103

---

11.          Finance Income and
Expenses

|                       |   | Year Ended   |  |   | Year Ended   |  |   | Ten Months   | 
|---------------------- | - | ------------ |  | - | ------------ |  | - | ------------ | 
|                       |   |              |  |   |              |  |   | Ended        | 
|                       |   | December 31, |  |   | December 31, |  |   | December 31, | 
|                       |   | 2014         |  |   | 2013         |  |   | 2012         | 
|Finance expense:       |   |              |  |   |              |  |   |              | 
|Interest expense       | $ | 197,682      |  | $ | 189,262      |  | $ | 22,813       | 
|Part XII.6 tax         |   | 11,889       |  |   | -            |  |   | 3,323        | 
|Accretion of provision |   | 66,776       |  |   | 6,513        |  |   | 14,323       | 
|Net finance expenses   | $ | 276,347      |  | $ | 195,775      |  | $ | 40,459       | 

12.         
Bank Indebtedness

The Company has a demand operating credit facility in the
amount of $15,000,000 with Alberta Treasury Branches. The facility is secured by
a general security agreement and a floating charge on all lands of the Company
and renewed annually. The facility bears interest at the banks prime rate plus
1.75%, as well as a standby charge for any undrawn funds.

Pursuant to the terms of the credit facility, the Company has
provided a financial covenant that at all times its working capital ratio shall
not be less than 1.0. The working capital ratio is defined under the terms of
the credit facilities as current assets including the undrawn portion of the
revolving operating demand line credit facility, to current liabilities,
excluding any current bank indebtedness.

At December 31, 2014, the Company has drawn a total of
$7,184,147 from the credit facility (December 31, 2013 - $4,500,000) and was in
compliance with the above financial covenant.

13.         
Capital Stock

| | (a) | Authorized                                                                                                                                                    
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                               
| |     | Unlimited number of common shares without par value.                                                                                                          
| |     |                                                                                                                                                               
| |     | Issued and outstanding                                                                                                                                        
| |     |                                                                                                                                                               
| |     | As at December 31, 2014, the Company had 75,368,498
      shares issued and outstanding. The following occurred during the year
      ended December 31, 2014:

| | (i)  | On May 14, 2014, the Company closed a bought-deal equity
      financing consisting of 13,333,500 common shares at a price of $0.75 per
      common share for aggregate gross proceeds of $10,000,125. In conjunction
      with the closing of the bought-deal equity financing, the Company paid
      $919,471 in share issuance costs (net of tax $680,408), which include
      $700,009 in finders fees.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | (ii) | The Company issued 690,000 common shares for the exercise
      of incentive stock options at various exercise prices for gross proceeds
      of $220,850. Additionally, the Company issued 37,500 common shares for the
      exercise of share purchase warrants at a price of $0.75 each for gross
      proceeds of $28,125.                                                                               

104

---

The following occurred during the year
ended December 31, 2013:

| | (iii) | On January 25, 2013, the Company closed the second and
      final tranche of a private placement consisting of 86,900 units at a price
      of $0.65 per unit for gross proceeds of $56,485. Each unit consisted of
      one common share and one-half of one non-transferrable share purchase
      warrant. Each whole warrant entitled the holder to purchase one additional
      common share at the price of $0.90 until January 25, 2014.                                                                                    
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       | Using the residual value method to value the units, the
      fair value of the common shares was $46,057, and the remaining balance of
      $10,428 was allocated to the share purchase warrants.                                                                                                                                                                                                                                                                                                                                    
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       | In conjunction with the closing of the private placement,
      $456 in finders fees and legal fees were paid and 700 finders warrants
      were issued. Each warrant entitled the holder to purchase one common share
      at a price of $0.90 until January 25, 2014.                                                                                                                                                                                                                                                            
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (iv)  | On December 9, 2013, the Company closed a bought-deal
      private placement consisting of 4,182,550 units, comprised of one common
      share and one-half of one warrant of the Company at a price of $0.55 per
      unit and 3,077,000 common shares to be issued on a flow- through basis at
      a price of $0.65 per flow-through share for aggregate gross proceeds of
      $4,300,453. Each whole warrant entitled the holder to acquire one common
      share of the Company at a price of $0.75 until December 9, 2014.
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       | Using the residual value method to value the units, the
      fair value of the common shares was $2,216,751, and the remaining balance
      of $83,651 was allocated to the share purchase warrants.                                                                                                                                                                                                                                                                                                                                 
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       | Using the residual value method to value the flow-through
      shares, the fair value of the common shares was $1,630,810, and the
      remaining balance of $369,240 was allocated to the flow-through premium
      liability.                                                                                                                                                                                                                                                                                                     
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       | In conjunction with the closing of the private placement,
      $571,137 in share issuance costs including commissions and legal fees were
      paid.                                                                                                                                                                                                                                                                                                                                                                                 
| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |       | In connection with the flow-through private placements
      completed on December 10, 2013, the Company fulfilled its obligation to
      incur qualified expenditures of $2,000,050 by December 31, 2014. At
      December 31, 2014, the balance in flow-through premium liability has been
      reduced to nil and transferred to flow-through share premium recovery on
      the statement of loss and comprehensive loss.                                                                                                      

The following occurred during the ten
months ended December 31, 2012:

| | (v) | On December 20, 2012, the Company closed a private
      placement consisting of 1,829,300 units at a price of $0.65 per unit for
      gross proceeds of $1,189,045. Each unit consisted of one common share and
      one-half of one share purchase warrant. Each whole warrant entitled the
      holder to purchase one additional common share at the price of $0.90 until
      December 20, 2013.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | Using the residual value method to value the units, the
      fair value of the common shares was $1,115,873 and the remaining balance
      of $73,172 was allocated to the share purchase warrants.                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                          
| |     | In conjunction with the closing of the private placement,
      $82,643 in finders fees and legal fees were paid and 114,191 finders
      warrants were issued. Each warrant entitled the holder to purchase one
      common share at a price of $0.90 until December 20,
2013.                                                                                                                      

105

---

| | (vi) | The Company received $1,051,228 through the exercise of
      1,752,047 share purchase warrants. Additionally, $1,250 was received
      through the exercise of 5,000 stock options.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | The Company has a stock option plan in place and is
      authorized to grant stock options to officers, directors, employees and
      consultants whereby the aggregate number of shares reserved for issuance
      may not exceed 10% of the issued shares at the time of grant and 5% of the
      issued shares to each optionee. Stock options are non-transferable and
      have a maximum term of five years. Stock options terminate no later than
      90 days (30 days for investor-related services) upon termination of
      employment or employment contract and one year in the case of retirement,
      death or disability. The grant price may not be less than the last closing
      price of the Companys shares and not less than $0.10 per share.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | During the year ended December 31, 2014, the Company
      received gross proceeds of $220,850 for the exercise of 690,000 stock
      options at various exercise prices.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |     | Details of the Companys stock options as at December 31,
      2014 and 2013 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Changes in the YearBalance
    
    
    
    
    
    
    
    
    
    
    
    Balance
    
    
    BalanceOutstanding
    
    
    
    
    
    
    
    
    
    
    
    Outstanding
    
    
    ExercisableExercise
    Expiry
    
    December 31,
    
    
    
    
    
    
    
    
    Expired/
    
    
    December 31,
    
    
    December 3Price
    Date
    
    2013
    
    
    Granted
    
    
    Exercised
    
    
    Cancelled
    
    
    2014
    
    
    1,
      2014$0.27
    28-Sep-14
    
    445,000
    
    
    -
    
    
    (444,000
    )
    
    (5,000
    )
    
    -
    
    
    -$0.25
    8-Mar-15
    
    485,000
    
    
    -
    
    
    (50,000
    )
    
    -
    
    
    435,000
    
    
    435,000$0.26
    30-Sep-15
    
    520,000
    
    
    -
    
    
    (30,000
    )
    
    -
    
    
    490,000
    
    
    490,000$0.30
    23-Dec-15
    
    425,000
    
    
    -
    
    
    (50,000
    )
    
    -
    
    
    375,000
    
    
    375,000$0.30
    27-Jan-16
    
    200,000
    
    
    -
    
    
    -
    
    
    -
    
    
    200,000
    
    
    200,000$0.38
    9-Feb-16
    
    50,000
    
    
    -
    
    
    -
    
    
    -
    
    
    50,000
    
    
    50,000$0.40
    26-May-16
    
    520,000
    
    
    -
    
    
    (45,000
    )
    
    -
    
    
    475,000
    
    
    475,000$0.48
    5-Jul-16
    
    50,000
    
    
    -
    
    
    -
    
    
    -
    
    
    50,000
    
    
    50,000$0.70
    8-Feb-17
    
    1,550,000
    
    
    -
    
    
    (50,000
    )
    
    -
    
    
    1,500,000
    
    
    1,500,000$0.65
    24-Apr-17
    
    75,000
    
    
    -
    
    
    -
    
    
    -
    
    
    75,000
    
    
    75,000$0.61
    5-Jul-17
    
    425,000
    
    
    -
    
    
    -
    
    
    -
    
    
    425,000
    
    
    425,000$0.50
    8-Mar-18
    
    250,000
    
    
    -
    
    
    -
    
    
    -
    
    
    250,000
    
    
    250,000$0.55
    6-Jan-19
    
    685,000
    
    
    -
    
    
    (25,000
    )
    
    -
    
    
    660,000
    
    
    660,000$0.65
    29-Sep-19
    
    -
    
    
    785,000
    
    
    -
    
    
    -
    
    
    785,000
    
    
    785,000$0.61
    7-Oct-19
    
    -
    
    
    200,000
    
    
    -
    
    
    -
    
    
    200,000
    
    
    200,0005,680,000
    
    
    985,000
    
    
    (690,000
    )
    
    (5,000
    )
    
    5,970,000
    
    
    5,970,000Weighted-average exercise price
    
    $
    0.48
    
    $
    0.64
    
    $
    0.32
    
    $
    0.27
    
    $
    0.52
    
    $
    0.52


106

---

Changes in the YearBalance
    
    
    
    
    
    
    
    
    
    
    
    Balance
    
    
    BalanceOutstanding
    
    
    
    
    
    
    
    
    
    
    
    Outstanding
    
    
    ExercisableDecember 31,
    
    
    
    
    
    
    
    
    
    
    
    December 31,
    
    
    December 32012
    
    
    
    
    
    
    
    
    
    
    
    2013
    
    
    1, 2013Exercise
    Expiry
    
    
    
    
    
    
    
    
    
    
    Expired/PriceDate
    
    
    
    
    Granted
    
    
    Exercised
    
    
    Cancelled$0.27
    28-Sep-14
    
    445,000
    
    
    -
    
    
    -
    
    
    -
    
    
    445,000
    
    
    445,000$0.25
    8-Mar-15
    
    485,000
    
    
    -
    
    
    -
    
    
    -
    
    
    485,000
    
    
    485,000$0.26
    30-Sep-15
    
    520,000
    
    
    -
    
    
    -
    
    
    -
    
    
    520,000
    
    
    520,000$0.30
    23-Dec-15
    
    425,000
    
    
    -
    
    
    -
    
    
    -
    
    
    425,000
    
    
    425,000$0.30
    27-Jan-16
    
    200,000
    
    
    -
    
    
    -
    
    
    -
    
    
    200,000
    
    
    200,000$0.38
    9-Feb-16
    
    50,000
    
    
    -
    
    
    -
    
    
    -
    
    
    50,000
    
    
    50,000$0.40
    26-May-16
    
    520,000
    
    
    -
    
    
    -
    
    
    -
    
    
    520,000
    
    
    520,000$0.48
    5-Jul-16
    
    50,000
    
    
    -
    
    
    -
    
    
    -
    
    
    50,000
    
    
    50,000$0.70
    8-Feb-17
    
    1,550,000
    
    
    -
    
    
    -
    
    
    -
    
    
    1,550,000
    
    
    1,550,000$0.65
    24-Apr-17
    
    75,000
    
    
    -
    
    
    -
    
    
    -
    
    
    75,000
    
    
    75,000$0.61
    5-Jul-17
    
    425,000
    
    
    -
    
    
    -
    
    
    -
    
    
    425,000
    
    
    425,000$0.50
    8-Mar-18
    
    -
    
    
    250,000
    
    
    -
    
    
    -
    
    
    250,000
    
    
    250,000$0.55
    6-Jan-19
    
    -
    
    
    685,000
    
    
    -
    
    
    -
    
    
    685,000
    
    
    685,0004,745,000
    
    
    935,000
    
    
    -
    
    
    -
    
    
    5,680,000
    
    
    5,680,000Weighted-average exercise price
    
    $
    0.47
    
    $
    0.54
    
    
    -
    
    
    -
    
    $
    0.48
    
    $
    0.48


107

---

For the year ended December 31, 2014,
the Company recognized $452,780 (year ended December 31, 2013 - $360,464; ten
months ended December 31, 2012 - $282,872) in share-based payment expense from
the granting of 985,000 (year ended December 31, 2013 - 935,000; ten months
ended December 31, 2012 - 500,000) options vesting immediately to directors,
officers, consultants and employees of the Company. The fair value was
determined using the Black-Scholes option pricing model with the following
weighted average assumptions:

| |                          |   | December 31, |  |   | December 31, |  |   | December 31, | 
| | ------------------------ | - | ------------ |  | - | ------------ |  | - | ------------ | 
| |                          |   | 2014         |  |   | 2013         |  |   | 2012         | 
| | Expected life (years)    |   | 5.00         |  |   | 5.00         |  |   | 5.00         | 
| |                          |   |              |  |   |              |  |   |              | 
| | Interest rate            |   | 1.59%        |  |   | 1.71%        |  |   | 1.18%        | 
| |                          |   |              |  |   |              |  |   |              | 
| | Volatility               |   | 91.99%       |  |   | 98.00%       |  |   | 137.48%      | 
| |                          |   |              |  |   |              |  |   |              | 
| | Dividend yield           |   | 0.00%        |  |   | 0.00%        |  |   | 0.00%        | 
| |                          |   |              |  |   |              |  |   |              | 
| | Fair value at grant date | $ | 0.46         |  | $ | 0.38         |  | $ | 0.56         | 

| |     | The weighted-average exercise price for stock options
      granted during the year ended December 31, 2014 was $0.64 (year ended
      December 31, 2013 - $0.54; ten months ended December 31, 2012 - $0.62).
      The forfeiture rate has been estimated at 0% (December 31, 2013 -
    0%).           
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                            
| |     | Throughout the year ended December 31, 2014, the Company
      removed $1,159 (year ended December 31, 2013 - $nil; ten months ended
      December 31, 2012 - $nil) from the share-based payment reserve and
      recorded a corresponding recovery in deficit for expired stock
    options.            
| |     |                                                                                                                                                                                                                                                                                                            
| |     | Throughout the year ended December 31, 2014, the Company
      removed $184,094 (year ended December 31, 2013 - $nil; ten months ended
      December 31, 2012 - $nil) from the share-based payment reserve and
      recorded a corresponding recovery in capital stock for exercised stock
      options.
| |     |                                                                                                                                                                                                                                                                                                            
| |     | Option pricing models require the input of highly
      subjective assumptions including the expected price volatility. Changes in
      the subjective input assumptions can materially affect the fair value
      estimate                                                                              
| |     |                                                                                                                                                                                                                                                                                                            
| | (c) | Share purchase warrants                                                                                                                                                                                                                                                                                    
| |     |                                                                                                                                                                                                                                                                                                            
| |     | Details of the Companys share purchase warrants as at
      December 31, 2014 and 2013 are as follows:                                                                                                                                                                                                    

Changes in the YearBalance Outstanding
    
    
    
    
    
    
    
    
    
    
    
    Balance OutstandingExercise
    Expiry
    
    & Exercisable
    
    
    
    
    
    
    
    
    Expired/
    
    
    & ExercisablePrice
    Date
    
    December 31, 2013
    
    
    Issued
    
    
    Exercised
    
    
    Cancelled
    
    
    December 31, 2014$0.90
    25-Jan-14
    
    43,450
    
    
    -
    
    
    -
    
    
    (43,450
    )
    
    -$0.90
    25-Jan-14
    
    700
    
    
    -
    
    
    -
    
    
    (700
    )
    
    -$0.95
    27-Jan-14
    
    6,161,578
    
    
    -
    
    
    -
    
    
    (6,161,578
    )
    
    -$0.95
    27-Jan-14
    
    86,256
    
    
    -
    
    
    -
    
    
    (86,256
    )
    
    -$0.70
    27-Jan-14
    
    862,620
    
    
    -
    
    
    -
    
    
    (862,620
    )
    
    -$0.75
    9-Dec-14
    
    2,091,275
    
    
    -
    
    
    (37,500
    )
    
    (2,053,775
    )
    
    -9,245,879
    
    
    -
    
    
    (37,500
    )
    
    (9,208,379
    )
    
    -Weighted-average
      exercise price
    
    $
    0.88
    
    
    -
    
    $
    0.75
    
    $
    0.88
    
    
    -


108

---

Changes in the YearBalance Outstanding
    
    
    
    
    
    
    
    
    
    
    
    Balance OutstandingExercise
    Expiry
    
    & Exercisable
    
    
    
    
    
    
    
    
    Expired/
    
    
    & ExercisablePrice
    Date
    
    December 31, 2012
    
    
    Issued
    
    
    Exercised
    
    
    Cancelled
    
    
    December 31, 2013$0.90
    20-Dec-13
    
    914,650
    
    
    -
    
    
    -
    
    
    (914,650
    )
    
    -$0.90
    20-Dec-13
    
    114,191
    
    
    -
    
    
    -
    
    
    (114,191
    )
    
    -$0.90
    25-Jan-14
    
    -
    
    
    43,450
    
    
    -
    
    
    -
    
    
    43,450$0.90
    25-Jan-14
    
    -
    
    
    700
    
    
    -
    
    
    -
    
    
    700$0.95
    27-Jan-14
    
    6,161,578
    
    
    -
    
    
    -
    
    
    -
    
    
    6,161,578$0.95
    27-Jan-14
    
    86,256
    
    
    -
    
    
    -
    
    
    -
    
    
    86,256$0.70
    27-Jan-14
    
    862,620
    
    
    -
    
    
    -
    
    
    -
    
    
    862,620$0.75
    9-Dec-14
    
    -
    
    
    2,091,275
    
    
    -
    
    
    -
    
    
    2,091,2758,139,295
    
    
    2,135,425
    
    
    -
    
    
    (1,028,841
    )
    
    9,245,879Weighted-average
      exercise price
    
    $
    0.92
    
    $
    0.75
    
    
    -
    
    $
    0.90
    
    $
    0.88


| |     | Throughout the year ended December 31, 2014, the Company
      removed $202,979 (year ended December 31, 2013 - $73,172; ten months ended
      December 31, 2012 - $nil) from the warrant reserve and recorded a
      corresponding recovery in deficit for expired warrants.   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                   
| |     | Throughout the year ended December 31, 2014, the Company
      removed $1,500 (year ended December 31, 2013 - $nil; ten months ended
      December 31, 2012 - $nil) from the warrant reserve and recorded a
      corresponding recovery in capital stock for exercised warrants.
| |     |                                                                                                                                                                                                                                                                                   
| | (d) | Loss per share                                                                                                                                                                                                                                                                    

| |                                                                           |   | Year Ended   |   |   | Year Ended   |   |   | Ten Months   |  
| | ------------------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ------------ | -
| |                                                                           |   | December 31, |   |   | December 31, |   |   | Ended        |  
| |                                                                           |   | 2014         |   |   | 2013         |   |   | December 31, |  
| |                                                                           |   |              |   |   |              |   |   | 2012         |  
| | Loss for the period                                                       | $ | (1,667,807   | ) | $ | (510,266     | ) | $ | (472,045     | )
| | Weighted average number of common shares outstanding, basic               |   | 70,075,411   |   |   | 54,479,558   |   |   | 50,888,868   |  
| | Dilutive stock options and share purchase warrants                        |   | -            |   |   | -            |   |   | -            |  
| | Weighted average
      number of common shares outstanding, fully diluted |   | 70,075,411   |   |   | 54,479,558   |   |   | 50,888,868   |  
| | Loss per share, basic                                                     | $ | (0.02        | ) | $ | (0.01        | ) | $ | (0.01        | )
| | Loss per share,
      fully diluted                                       | $ | (0.02        | ) | $ | (0.01        | ) | $ | (0.01        | )

For the years ended December 31, 2014
and 2013, and ten months ended December 31, 2012, the Company incurred a loss;
therefore, dilutive stock options and share purchase warrants were nil.

109

---

14.         
Commitment

The Company has a commitment to make monthly rental payments
pursuant to the office rental agreement at its current location until May 30,
2018. The following table shows the Companys rental commitment amounts for the
next four fiscal years:

|                  |   | 2015    |  |   | 2016    |  |   | 2017    |  |   | 2018   | 
|----------------- | - | ------- |  | - | ------- |  | - | ------- |  | - | ------ | 
|Rental commitment | $ | 191,226 |  | $ | 191,226 |  | $ | 191,226 |  | $ | 79,678 | 

The rent expense in the statement of loss and comprehensive
loss for the year ended December 31, 2014 amounted to $159,745 (year ended
December 31, 2013 - $84,954; ten month period December 31, 2012 - $68,346)

15.         
Related Party Transactions

For the year ended December 31, 2014, the Company paid fees of
$40,000 (year ended December 31, 2013 - $40,000) to a director of the Company.
These fees were charged for services provided by the Chairman of the Companys
Board of Directors.

Remuneration of key executive personnel, consisting of the
Companys officers, directors and Chairman, were awarded as follows for the
years ended December 31, 2014 and December 31, 2013, and ten months ended
December 31, 2012:

|                     |   | Year Ended   |  |   | Year Ended   |  |   | 10 Months Ended | 
|-------------------- | - | ------------ |  | - | ------------ |  | - | --------------- | 
|                     |   | December 31, |  |   | December 31, |  |   | December 31,    | 
|                     |   | 2014         |  |   | 2013         |  |   | 2012            | 
|                     |   |              |  |   |              |  |   |                 | 
|Short-term benefits  | $ | 986,666      |  | $ | 750,000      |  | $ | 540,416         | 
|                     |   |              |  |   |              |  |   |                 | 
|Share-based payments | $ | 377,753      |  | $ | 125,808      |  | $ | 196,386         | 

No long-term benefits were paid to related parties.

16.          Supplemental Cash Flow
Information

|                                                |   | Year Ended   |   |   | Year Ended   |   |   | Ten Months   |  
|----------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ------------ | -
|                                                |   | December 31, |   |   | December 31, |   |   | Ended        |  
|                                                |   | 2014         |   |   | 2013         |   |   | December 31, |  
|                                                |   |              |   |   |              |   |   | 2012         |  
|Provided by (used in):                          |   |              |   |   |              |   |   |              |  
|Accounts receivable                             | $ | (261,845     | ) | $ | (137,953     | ) | $ | 347,931      |  
|Prepaid expenses                                |   | (29,757      | ) |   | 12,597       |   |   | (89,734      | )
|Accounts payable and accrued liabilities        |   | 2,921,158    |   |   | (936,333     | ) |   | 2,814,444    |  
|Total changes in
      non-cash working capital | $ | 2,629,556    |   | $ | (1,061,689   | ) | $ | 3,072,641    |  
|Provided by (used in):                          |   |              |   |   |              |   |   |              |  
|Operating activities                            | $ | (13,353      | ) | $ | (123,928     | ) | $ | 406,975      |  
|Investing activities                            |   | 2,642,909    |   |   | (947,511     | ) |   | 2,665,666    |  
|Financing
      activities                      |   | -            |   |   | 9,750        |   |   | -            |  
|Total changes in non-cash working capital       | $ | 2,629,556    |   | $ | (1,061,689   | ) | $ | 3,072,641    |  

110

---

Interest paid on the Companys bank loan during the year ended
December 31, 2014 was $197,682 (year ended December 31, 2013 - $189,362; ten
months ended December 31, 2012 - $22,813). During the year ended December 31,
2014 the Company paid $nil in income taxes (year ended December 31, 2013 - $nil;
ten months ended December 31, 2012  $nil).

17.          Subsequent
Events

On January 29, 2015, the Company granted 1,225,000 incentive
stock options to directors, employees and consultants at an exercise price of
$0.24 per share.

In February and March 2015, the Company received proceeds of
$108,750 for the exercise of 435,000 incentive stock options with an exercise
price of $0.25 per share.

On March 1, 2015, the Company granted 100,000 incentive stock
options to a consultant at an exercise price of $0.39 per share.

18.         
Income Taxes

Effective April 1, 2013, the British Columbia provincial tax
increased from 10.00% to 11.00% and the Canadian federal corporate tax rate
remained unchanged at 15.00% . The overall increase in tax rates resulted in an
increase in the Companys statutory tax rate from 25.00% to 25.75% .

The reconciliation of income tax computed at the statutory tax
rate of 26.00% (year ended December 31, 2013 - 25.75%; ten months ended December
31, 2012 - 25.00%) to income tax (recovery) expense is:

|                                                                                            |   |              |   |   |              |   |   | Ten Months   |  
|------------------------------------------------------------------------------------------- | - | ------------ | - | - | ------------ | - | - | ------------ | -
|                                                                                            |   | Year Ended   |   |   | Year Ended   |   |   | Ended        |  
|                                                                                            |   | December 31, |   |   | December 31, |   |   | December 31, |  
|                                                                                            |   | 2014         |   |   | 2013         |   |   | 2012         |  
|                                                                                            |   |              |   |   |              |   |   |              |  
|Income (loss) before income taxes                                                           | $ | (1,538,255   | ) | $ | (867,839     | ) | $ | (159,738     | )
|                                                                                            |   |              |   |   |              |   |   |              |  
|Statutory income tax rate                                                                   |   | 26.00%       |   |   | 25.75%       |   |   | 25.00%       |  
|                                                                                            |   |              |   |   |              |   |   |              |  
|Expected income tax expense (recovery)                                                      |   | (399,946     | ) |   | (223,469     | ) |   | (39,935      | )
|                                                                                            |   |              |   |   |              |   |   |              |  
|Non-deductible items                                                                        |   | 21,720       |   |   | 94,497       |   |   | 74,299       |  
|                                                                                            |   |              |   |   |              |   |   |              |  
|Temporary differences of property and
      equipment and evaluation and exploration assets |   | 507,778      |   |   | (247,295     | ) |   | 301,776      |  
|                                                                                            |   |              |   |   |              |   |   |              |  
|Effect of change in tax rate                                                                |   | -            |   |   | 17,740       |   |   | -            |  
|                                                                                            |   |              |   |   |              |   |   |              |  
|Unused tax losses and tax offsets not recognized                                            |   | -            |   |   | 954          |   |   | (23,833      | )
|                                                                                            |   |              |   |   |              |   |   |              |  
|Deferred tax expense (recovery)                                                             | $ | 129,552      |   | $ | (357,573     | ) | $ | 312,307      |  

The tax affected items that give rise to significant portions
of the deferred tax asset at December 31, 2014 and 2013 are presented below:

111

---

December 31,
    
    
    December 31,2014
    
    
    2013Deferred tax assetsNon-capital losses
    $
    1,708,702
    
    $
    1,839,139Exploration and evaluation assets
    
    8,641,617
    
    
    5,076,498Share issue costs
    
    341,076
    
    
    241,943Decommissioning obligations
    
    1,350,465
    
    
    527,54812,041,860
    
    
    7,685,128Deferred income tax liabilityProperty and
      equipment
    
    10,399,944
    
    
    6,152,723$
    1,641,916
    
    $
    1,532,405


As at December 31, 2014, the Company has unrecognized
deductible temporary differences consisting of net capital losses of $95,333
(December 31, 2013 - $95,333), which may be carried forward indefinitely to
reduce future taxable capital gains.

The Company assessed the probability that future taxable profit
will be available against which the Company can utilize the benefits of tax
pools in excess of the carrying amount of assets and recorded deferred tax
assets.

The Company has the following income tax pools available at the
end of the year:

December 31, 2014
    
    
    December 31, 2013Canadian exploration expense
    $
    3,336,823
    
    $
    3,277,968Canadian development expense
    
    24,371,718
    
    
    9,528,985Canadian oil and gas property expense
    
    8,352,690
    
    
    8,646,028Non-capital loss carry forwards
    
    6,571,929
    
    
    7,073,611Undepreciated capital cost
    
    2,870,328
    
    
    3,747,124Share issuance
      costs and other
    
    1,591,613
    
    
    1,211,572$
    47,095,101
    
    $
    33,485,288


112

---

As at December 31, 2014, the Company has non-capital losses of
approximately $6,572,000 that may be applied to reduce future Canadian taxable
income, expiring as follows:

Available to2026
    $
    547,0002027
    
    341,0002028
    
    216,0002029
    
    312,0002030
    
    323,0002031
    
    557,0002032
    
    1,736,0002033
    
    2,540,000$
    6,572,000


19.          Segmented
Information

The Company operates in one reportable operating segment, being
the acquisition, exploration, development and production of petroleum and
natural gas interests. The Companys assets and activities are located in
Canada.

113

---

SUPPLEMENTARY OIL AND GAS RESERVE ESTIMATION AND DISCLOSURES
 ASC 932 (UNAUDITED)

Select supplementary oil and gas reserve estimation and
disclosure are provided in accordance with U.S. disclosure requirements. The
standards of the SEC require that proved reserves be estimated using existing
economic conditions (constant pricing). Based on this methodology, our results
have been calculated using the 12-month average price for each of the years
presented within this supplementary disclosure.

(a) Net proved oil and gas reserves

As at December 31, 2014, all of our oil and gas reserves are
located in Canada.

McDaniel & Associates Consultants (McDaniel) of Calgary,
Alberta, independent petroleum engineering consultants, were retained to
evaluate our properties. Their report, titled Evaluation of Oil and Gas
Reserves, Hemisphere Energy Corporation, was completed March 11, 2015 and has
an effective date of December 31, 2014. McDaniel previously evaluated the
properties as of December 31, 2013 and was completed May 27, 2014.

Sproule Associates Limited (Sproule) of Calgary, Alberta,
independent petroleum engineering consultants, were also retained to evaluate
our properties as of December 31, 2012. Their report titled Evaluation of the
P&NG Reserves of Hemisphere Energy Corporation (As of December 31, 2012)
Constant Dollars was completed on September 12, 2014 and has an effective date
December 31, 2012.

In accordance with the SECs definitions and guidelines,
McDaniel and Sproule, have used constant prices and costs in estimating the
reserves and future net cash flows contained in their reports. Actual future net
cash flows will be affected by other factors, such as actual production levels,
supply and demand for oil and natural gas, curtailments or increases in
consumption by oil and natural gas purchasers, changes in governmental
regulation or taxation and the impact of inflation on costs.

The tables in this section set forth oil and gas information
prepared in accordance with U.S. disclosure standards, including Accounting
Standards Codification 932 (ASC 932). Reserves have been estimated in
accordance with the SECs definitions and guidelines. The changes in our net
proved reserve quantities are outlined below.

Net reserves are our royalty and working interest remaining
reserves, less all Crown, freehold, and overriding royalties and interests that
are not owned by us.

Proved reserves are those estimated quantities of crude oil,
natural gas and natural gas liquids that can be estimated with a high degree of
certainty to be economically recoverable under existing economic and operating
conditions. It is likely that the actual remaining quantities recovered will
exceed the estimated proved reserves.

Proved developed reserves are those reserves that are expected
to be recovered from existing wells and installed facilities or, if facilities
have not been installed, that would involve a low expenditure (e.g. when
compared to the cost of drilling a well) to put the reserves on production.
Developed reserves may be subdivided into producing and non-producing.

Proved undeveloped reserves are those reserves that are
expected to be recovered from known accumulations where a significant
expenditure (e.g. when compared to the cost of drilling a well) is required to
render them capable of production.

Users of the information are cautioned as the process of
estimating crude oil and natural gas reserves is subject to a level of
uncertainty. The reserves are based on economic and operating conditions;
therefore, changes can be made to future assessments as a result of a number of
factors, which can include new technology, changing economic conditions and
development activity.

114

---

Quantity InformationFor the Year Ended December 31,
2014

|                                     |  | Total Canada, North America |  
|------------------------------------ |  | --------------------------- | -
|                                     |  | Heavy Oil                   |  
|                                     |  | (Mbbl)                      |  
|                                     |  |                             |  
|December 31, 2013                    |  |                             |  
|Beginning of year                    |  | 992                         |  
|Revision of Previous
      estimates |  | 105                         |  
|Improved Recovery                    |  |                             |  
|Purchases of mineral in
      place  |  | 15                          |  
|Extensions and discoveries           |  | 750                         |  
|Production                           |  | (174                        | )
|Sales of minerals in place           |  |                             |  
|End of year                          |  | 1,688                       |  
|December 31, 2014                    |  |                             |  
|Developed Producing                  |  | 787                         |  
|Developed Non-Producing              |  | 170                         |  
|Undeveloped                          |  | 731                         |  
|Total                                |  | 1,688                       |  

Positive revisions were mainly due to positive performance from
the Atlee property. The Extensions were due to successful drilling at the Atlee
property and the Pekisko at the Jenner property. In total, 18 wells/locations
were added within the Extension category. The Purchases of Minerals-In-Place
refers to the purchase of a portion of the Atlee property.

Quantity InformationFor the Year Ended December 31,
2013

|                                     |  | Total Canada, North America |  
|------------------------------------ |  | --------------------------- | -
|                                     |  | Heavy Oil                   |  
|                                     |  | (Mbbl)                      |  
|                                     |  |                             |  
|December 31, 2012                    |  |                             |  
|Beginning of year                    |  | 639                         |  
|Revision of Previous
      estimates |  | 71                          |  
|Improved Recovery                    |  |                             |  
|Purchases of mineral in
      place  |  | 222                         |  
|Extensions and discoveries           |  | 181                         |  
|Production                           |  | (121                        | )
|Sales of minerals in place           |  |                             |  
|End of year                          |  | 992                         |  
|December 31, 2013                    |  |                             |  
|Developed Producing                  |  | 448                         |  
|Developed Non-Producing              |  | 21                          |  
|Undeveloped                          |  | 523                         |  
|Total                                |  | 992                         |  

From December 31, 2012 to December 31, 2013, there was a
positive natural gas revision due to changes in prices of 66 MMcf. The remaining
positive revisions of 71 Mbbl and 206 MMcf were due to positive performance from
the Jenner property. The Extensions were due to successful drilling in the
Jenner QQ and MM pools. In total, five wells/locations were added within the Extension category. The
Purchases of Minerals-In-Place refers to the purchase of the Atlee property.

115

---

Quantity InformationFor the Year Ended December 31,
2012

|                                      |  | Total Canada, North America |  
|------------------------------------- |  | --------------------------- | -
|                                      |  | Heavy Oil                   |  
|                                      |  | (Mbbl)                      |  
|                                      |  |                             |  
|February 29, 2012                     |  |                             |  
|Beginning of year                     |  | 277                         |  
|Revisions of Previous
      estimates |  | 118                         |  
|Improved Recovery                     |  |                             |  
|Purchases of mineral in
      place   |  |                             |  
|Extensions and discoveries            |  | 349                         |  
|Production                            |  | (105                        | )
|Sales of minerals in place            |  |                             |  
|End of year                           |  | 639                         |  
|December 31, 2012                     |  |                             |  
|Developed Producing                   |  | 401                         |  
|Developed Non-Producing               |  | 21                          |  
|Undeveloped                           |  | 217                         |  
|Total                                 |  | 639                         |  

From February 29, 2012 to December 31, 2012, there was a
negative natural gas revision due to changes in prices of 155 MMcf with the
remaining negative revision of 23 MMcf due to lower than expected solution gas
from the Jenner property. The Heavy Oil revision of 118 Mbbl was due to positive
performance from the Jenner property. The Extensions were due to successful
drilling in the Jenner property. In total, 11 wells/locations were added within
the Extension category.

(b) Capitalized Costs

Capitalized Costs Relating to Oil and Gas Producing
ActivitiesAt December 31, 2014, December 31, 2013 and December 31, 2012
(CA$)

|                                       |   | Entitys Share of Equity Method
      Investees | 
|-------------------------------------- | - | ----------------------------------------------- | 
|                                       |   | 12 Months Ended                                 | 
|                                       |   | December 31, 2014                               | 
|                                       |   |                                                 | 
|Unproved oil and gas
      properties  | $ | 2,896,886                                       | 
|Proved oil and gas properties          |   | 62,718,738                                      | 
|Total capital costs                    |   | 65,615,624                                      | 
|Accumulated depletion and depreciation |   | 14,636,389                                      | 
|Impairment                             |   | 5,212,237                                       | 
|Net capitalized costs                  | $ | 45,766,998                                      | 

(c) Costs Incurred

Costs Incurred in Oil and Gas Property Acquisition, Exploration
and Development

For the Year Ended December 31, 2014, Year Ended December 31,
2013 and Ten Months Ended December 31, 2012(CA$)

116

---

|                                      |   | Total Canada, North America | 
|------------------------------------- | - | --------------------------- | 
|                                      |   | 12 Months Ended             | 
|                                      |   | December 31, 2014           | 
|                                      |   |                             | 
|Acquisition of properties:            |   |                             | 
|Proved oil and gas properties         | $ | 610,000                     | 
|Unproved oil and gas
      properties |   | 264,736                     | 
|Exploration costs(1)                  |   | 1,794,169                   | 
|Development costs(2)                  |   | 18,015,751                  | 
|Capital
      expenditures            | $ | 20,684,657                  | 

Notes:

| | (1) | Geological and geophysical capital expenditures and
      preliminary drill costs for exploration wells
| | --- | -------------------------------------------------------------------------------------------------------
| | (2) | Includes equipping and facilities capital
    expenditures                                             

(d) Results of Operations of Producing Activities

Results of Operations for Oil and Gas Producing Activities

For the Year Ended December 31, 2014, Year Ended December 31,
2013 and Ten Months Ended December 31, 2012 (CA$)

|                                                                                                        |   | Total Canada, North America |  
|------------------------------------------------------------------------------------------------------- | - | --------------------------- | -
|                                                                                                        |   | 12 Months Ended             |  
|                                                                                                        |   | December 31, 2014           |  
|                                                                                                        |   |                             |  
|Revenues:                                                                                               |   |                             |  
|Oil and gas sales, net of royalties                                                                     | $ | 13,626,902                  |  
|Transfers                                                                                               |   | -                           |  
|Total                                                                                                   |   | 13,626,902                  |  
|Production and operating expense                                                                        |   | 4,351,248                   |  
|Exploration and evaluation expense                                                                      |   | 190,887                     |  
|Depreciation, depletion, accretion
      amortization and valuation allowances                          |   | 8,130,690                   |  
|Income tax
      (expense) recovery                                                                     |   | (129,552                    | )
|Results of operations from producing activities
      (excluding corporate overhead and interest costs) | $ | 824,525                     |  

(e) Standardized Measure of Discounted Future Net
Cash Flows and Changes Therein

The standardized measure of discounted future net cash flows is
based on estimates made by McDaniel and Sproule of net proved reserves. Future
cash inflows are computed based on the average of the first day constant prices
in each of the 12 months for the year ended December 31, 2013 and cost
assumptions applied against annual future production from proved crude oil and
natural gas reserves. Future development and production costs are computed based
on the average of the first day constant prices in each of the 12 months for the
year ended December 31, 2013 and assume the continuation of existing economic
conditions. Future income taxes are calculated by applying statutory income tax
rates. We are currently not taxable. The standardized measure of discounted
future net cash flows is computed using a 10 percent discount factor.

Users of the information are cautioned that the discounted
future net cash flows relating to proved oil and gas reserves are neither an
indication of the fair market value of our oil and gas properties, nor of the
future net cash flows expected to be generated from such properties. The
discounted future cash flows do not include the fair market value of exploratory
properties and probable or possible oil and gas reserves, nor is consideration
given to the effect of anticipated future changes in crude oil and natural gas
prices, development, asset retirement and production costs and possible changes
to tax and royalty regulations. The prescribed discount rate of 10 percent is
arbitrary and may not appropriately reflect future interest rates.

117

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Standardized Measure of Discounted Future Net Cash FlowsAt
December 31, 2014 (CA$ thousands)

|                                                          |   | Canada  |   |   | Total   |  
|--------------------------------------------------------- | - | ------- | - | - | ------- | -
|Future cash inflows after royalties                       | $ | 137,930 |   | $ | 137,930 |  
|Future production, abandonment and salvage costs          | $ | (51,722 | ) | $ | (51,722 | )
|Future development costs                                  | $ | (18,405 | ) | $ | (18,405 | )
|Future income tax expenses                                | $ | (7,053  | ) | $ | (7,053  | )
|Future net cash flows                                     | $ | 60,750  |   | $ | 60,750  |  
|10% annual discount for estimated timing of cash flows    | $ | (14,540 | ) | $ | (14,540 | )
|Standardized measure of discounted future net cash flows* | $ | 46,210  |   | $ | 46,210  |  

* We estimate an additional $89K PV abandonment costs on wells
that were not assigned reserves.

Standardized Measure of Discounted Future Net Cash FlowsAt
December 31, 2013 (CA$ thousands)

|                                                          |   | Canada  |   |   | Total   |  
|--------------------------------------------------------- | - | ------- | - | - | ------- | -
|Future cash inflows after royalties                       | $ | 72,176  |   | $ | 72,176  |  
|Future production, abandonment and salvage costs          | $ | (30,576 | ) | $ | (30,576 | )
|Future development costs                                  | $ | (10,490 | ) | $ | (10,490 | )
|Future income tax expenses                                | $ | (1,277  | ) | $ | (1,277  | )
|Future net cash flows                                     | $ | 29,833  |   | $ | 29,833  |  
|10% annual discount for estimated timing of cash flows    | $ | (7,745  | ) | $ | (7,745  | )
|Standardized measure of discounted future net cash flows* | $ | 22,088  |   | $ | 22,088  |  

* We estimate an additional $285 PV abandonment costs on wells
that were not assigned reserves.

Standardized Measure of Discounted Future Net Cash FlowsAt
December 31, 2012 (CA$ thousands)

|                                                          |   | Canada  |   |   | Total   |  
|--------------------------------------------------------- | - | ------- | - | - | ------- | -
|Future cash inflows after royalties                       | $ | 46,253  |   | $ | 46,253  |  
|Future production, abandonment and salvage costs          | $ | (16,830 | ) | $ | (16,830 | )
|Future development costs                                  | $ | (5,720  | ) | $ | (5,720  | )
|Future income tax expenses                                | $ | (1,740  | ) | $ | (1,740  | )
|Future net cash flows                                     | $ | 21,963  |   | $ | 21,963  |  
|10% annual discount for estimated timing of cash flows    | $ | (4,821  | ) | $ | (4,821  | )
|Standardized measure of discounted future net cash flows* | $ | 17,142  |   | $ | 17,142  |  

* We estimate an additional $27K PV abandonment costs on wells
that were not assigned reserves.

(f) Changes in Standardized Measure of Discounted Net
Cash Flows

For the Year Ended December 31, 2014 (CA$ thousands)

118

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|                                                                                |   | Total   |  
|------------------------------------------------------------------------------- | - | ------- | -
|Beginning Balance, January 1, 2014                                              | $ | 22,088  |  
|                                                                                |   |         |  
|Sales and transfers of oil and gas produced
      during the period             |   | (9,276  | )
|Net change in sales and transfer prices and in production
      (lifting) costs |   | 3,308   |  
|Change in estimated future development
      costs                              |   | (27,443 | )
|Net change due to extension, discoveries, and improved
      recovery           |   | 21,426  |  
|Net change due to purchase and sale of
      minerals in place                  |   | 386     |  
|Development costs incurred during the period                                    |   | 20,685  |  
|Net change due to revisions in quantity
      estimates and timing              |   | 17,333  |  
|Accretion of discount                                                           |   | 2,297   |  
|Other-unspecified                                                               |   | -       |  
|Net change in income taxes                                                      |   | (4,594  | )
|                                                                                |   |         |  
|Ending Balance,
      December 31, 2014                                         | $ | 46,210  |  

For the Year Ended December 31, 2013 (CA$ thousands)

|                                                                                |   | Total  |  
|------------------------------------------------------------------------------- | - | ------ | -
|Beginning Balance, January 1, 2013                                              | $ | 17,142 |  
|                                                                                |   |        |  
|Sales and transfers of oil and gas produced
      during the period             |   | (5,437 | )
|Net change in sales and transfer prices and in production
      (lifting) costs |   | (247   | )
|Change in estimated future development
      costs                              |   | (8,123 | )
|Net change due to extension, discoveries, and improved
      recovery           |   | 3,971  |  
|Net change due to purchase and sale of
      minerals in place                  |   | 3,838  |  
|Development costs incurred during the period                                    |   | 6,400  |  
|Net change due to revisions in quantity
      estimates and timing              |   | 2,184  |  
|Accretion of discount                                                           |   | 1,853  |  
|Other-unspecified                                                               |   | -      |  
|Net change in income taxes                                                      |   | 507    |  
|                                                                                |   |        |  
|Ending Balance,
      December 31, 2013                                         | $ | 22,088 |  

For the Ten Months Ended December 31, 2012 (CA$ thousands)

|                                                                                |   | Total   |  
|------------------------------------------------------------------------------- | - | ------- | -
|Beginning Balance, February 29, 2012                                            | $ | 10,282  |  
|                                                                                |   |         |  
|Sales and transfers of oil and gas produced
      during the period             |   | (4,657  | )
|Net change in sales and transfer prices and in production
      (lifting) costs |   | (1,043  | )
|Change in estimated future development
      costs                              |   | (10,167 | )
|Net change due to extension, discoveries, and improved
      recovery           |   | 9,589   |  
|Net change due to purchase and sale of
      minerals in place                  |   | -       |  
|Development costs incurred during the period                                    |   | 11,400  |  
|Net change due to revisions in quantity
      estimates and timing              |   | 2,098   |  
|Accretion of discount                                                           |   | 1,028   |  
|Other-unspecified                                                               |   | -       |  
|Net change in income taxes                                                      |   | (1,388  | )
|                                                                                |   |         |  
|Ending Balance,
      December 31, 2012                                         | $ | 17,142  |  

119

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SIGNATURES

The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this annual report on its behalf.

|                     |     | HEMISPHERE ENERGY CORP.
|-------------------- | --- | -----------------------
|                     |     |                        
|                     |     |                        
|Date: April 30, 2015 | By: | /s/ DORLYN EVANCIC     
|                     |     | Dorlyn Evancic         
|                     |     | Chief Financial Officer

120

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EXHIBITS

|Exhibit |  |                                                                                                                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number  |  | Description                                                                                                                                                                                                                                                                                                                     
|1.1     |  | Articles (incorporated herein by reference to Exhibit 1.1
      to our Registration Statement on Form 20-F filed with the SEC on July 22,
      2014)                                                                                                                                                                           
|1.2     |  | Notice of Articles (incorporated herein by reference to
      Exhibit 1.2 to our Registration Statement on Form 20-F filed with the SEC
      on July 22, 2014)                                                                                                                                                                 
|1.3     |  | Certificate of change of name to Hemisphere Energy
      Corporation dated April 24, 2009 (incorporated herein by reference to
      Exhibit 1.3 to our Registration Statement on Form 20-F filed with the SEC
      on July 22, 2014)                                                                                          
|1.4     |  | Certificate of change of name to Northern Hemisphere
      Development Corp. dated January 14, 2000 (incorporated herein by reference
      to Exhibit 1.4 to our Registration Statement on Form 20-F filed with the
      SEC on July 22, 2014)                                                                                
|1.5     |  | Certificate of change of name to Hemisphere Development
      Corp. dated May 18, 1978 (incorporated herein by reference to Exhibit 1.5
      to our Registration Statement on Form 20-F filed with the SEC on July 22,
      2014)                                                                                             
|2.1     |  | Shareholders Rights Plan Agreement between Hemisphere and
      Computershare Investor Services Inc. dated March 9, 2010, as amended
      (incorporated herein by reference to Exhibit 2.1 to our Registration
      Statement on Form 20-F filed with the SEC on July 22, 2014)                                               
|2.2     |  | Advance Notice Policy of Hemisphere Energy Corporation
      (incorporated herein by reference to Exhibit 14.1 to our Registration
      Statement on Form 20-F filed with the SEC on July 22, 2014)                                                                                                                            
|4.1     |  | Commitment letter between Hemisphere Energy Corporation
      and Alberta Treasury Branches dated September 19, 2013 (incorporated
      herein by reference to Exhibit 10.6 to our Registration Statement on Form
      20-F filed with the SEC on July 22, 2014)                                                              
|4.2     |  | First Amending Agreement to the Commitment Letter dated
      September 19, 2013 between Hemisphere Energy Corporation and Alberta
      Treasury Branches effective June 23, 2014 (incorporated herein by
      reference to Exhibit 10.7 to our Registration Statement on Form 20-F filed
      with the SEC on July 22, 2014)
|4.3     |  | Second Amending Agreement to the Commitment Letter dated
      September 19, 2013 between Hemisphere Energy Corporation and Alberta
      Treasury Branches effective November 18, 2014                                                                                                                                         
|4.4#    |  | Executive Employment Agreement between Hemisphere Energy
      Corporation and Don Simmons dated September 1, 2014                                                                                                                                                                                                              
|4.5#    |  | Executive Employment Agreement between Hemisphere Energy
      Corporation and Ian Duncan dated September 1, 2014                                                                                                                                                                                                               
|4.6#    |  | Executive Employment Agreement between Hemisphere Energy
      Corporation and Dorlyn Evancic dated September 1, 2014                                                                                                                                                                                                           
|4.7#    |  | Executive Employment Agreement between Hemisphere Energy
      Corporation and Andrew Arthur dated September 1, 2014                                                                                                                                                                                                            
|4.8#    |  | Executive Employment Agreement between Hemisphere Energy
      Corporation and Ashley Ramsden- Wood dated September 1, 2014                                                                                                                                                                                                     
|10.1    |  | Stock Option Plan (incorporated herein by reference to
      Exhibit 10.1 to our Registration Statement on Form 20-F filed with the SEC
      on July 22, 2014)                                                                                                                                                                 
|12.1    |  | Certification of the chief executive officer pursuant to
      Rule 13a-14(a)                                                                                                                                                                                                                                                   
|12.2    |  | Certification of
    the chief financial officer pursuant to Rule
      13a-14(a)                                                                                                                                                                                                                                               
|13.1    |  | Certification of the chief executive officer pursuant to
      18 U.S.C. Section 1350                                                                                                                                                                                                                                           
|13.2    |  | Certification of the chief financial officer pursuant to
      18 U.S.C. Section 1350                                                                                                                                                                                                                                           
|15.1    |  | Consent of Smythe Ratcliffe LLP                                                                                                                                                                                                                                                                                                 
|15.2    |  | Consent of McDaniel Associates & Consultants Ltd.                                                                                                                                                                                                                                                                               
|15.3    |  | Consent of Sproule Associates Limited                                                                                                                                                                                                                                                                                           
|99.1    |  | McDaniel & Associates Consultants Ltd. - Report of
      Third Party for the Evaluation of Oil and Gas Reserves attributed to
      selected Hemisphere Energy Corporation's interests in Western Canada
      (effective date of December 31, 2014)                                                                            
|99.2    |  | McDaniel & Associates Consultants Ltd. - Report of
      Third Party for the Evaluation of Oil and Gas (effective date of December 31, 2013) (incorporated
      herein by reference to Exhibit 14.1 to our Registration Statement on Form
      20-F (Amendment No. 1) filed with the SEC on October 6, 2014)                  
|99.3    |  | Sproule Associates Limited  Evaluation of the P&NG
      Reserves of Hemisphere Energy Corporation (as of December 31, 2012)
      Constant Dollars (incorporated herein by reference to Exhibit 4.2 to our
      Registration Statement on Form 20-F (Amendment No. 1) filed with the SEC
      on October 6, 2014)           

# Denotes management compensation plan or contract.

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